In the first article we discussed how and why companies may have built up subsidiary operations that are now non-essential and some of the factors that may lead to the need to sell them. In it, we look at what objectives you may want to secure in order to achieve a divestiture and how these impact how you will divest from a secondary operation, as well as the factors that may block a divestiture.
What do you want from a layout?
The key results you are looking to get from the removal process will obviously be heavily influenced by the primary reasons for the removal.
In some cases, the driver will be simply effective, and the more, the faster, the better. But in many situations, cash may not be the only, or even the key, consideration, and other factors may rank higher, such as:
• Free up management time – to focus on core areas that are important to the future of the business, in which case speed and certainty of completion can be key criteria. In these cases, you will look for parties you can trust to act quickly and see a transaction through to completion.
• Maintain public relations and market image, so as not to damage the position of the retained business or relations with its clients. After all, the central operation may wish to maintain ongoing business dealings with respect to its other services. In these cases, you will look for parties who can be trusted both to act with discretion and to be a safe pair of hands to pass on the leased operation to provide ongoing customer services.
• Maintaining relations with employees: This is a similar problem to that of customers, since the company may want to demonstrate that, despite the provision, it cares about ensuring that its employees are properly cared for. In these cases, it will seek that the other party intends to carry on the business with the existing employees.
As an example, a US multinational decided that it wanted to focus on its core products, which in part involved supplying the automotive sector, and the restructuring would be completed by the end of the year. However, as a legacy from a previous acquisition, it had a small, underperforming manufacturing unit in the UK, operating in a completely different field in which the parent group had no experience; but that it was supplying key components to its major automotive customers.
So the parent company needed to get out of business quickly, but in a way that meant taking care of its employees, supporting its customers (and ideally addressing performance issues).
Therefore, a deal was made to sell the business to an acquisitive business focused on manufacturing operations. They finished in two weeks during the run up to Christmas and then used their manufacturing expertise to fix the quality issues plaguing the operation.
How can you get rid of a secondary operation?
There are several ways a company can organize divestment. You may choose to close, spin-off or sell the relevant operation, and the approach taken often depends on the objective sought, the relative size of the transaction compared to the parent company and the urgency of the situation.
• Close – is often the least favored option for various reasons. In PR terms it tends to be seen as an admission of failure, in financial terms it tends to incur significant costs such as severance pay, and in operational terms this process actually sucks up management time. Therefore, it will occur in cases where other options are not viable or where part of the motivation for closure is to remove excess productive capacity from the market.
• Spin-off – where part of the business is allowed to operate as a separate business entity, it can be used to free up management time in the main business. It can also be used as a springboard towards a complete sale of the parent’s stake in the now independent entity.
• Sell – involves disposing of the relevant transaction to another organization through anything from a full corporate finance disposal exercise to the kind of quick transaction involved in the example above.
What factors can act against making a divestment?
Many potential investments do not actually go that far as a result of management’s perception of the operation. For example, they may view current poor performance as a temporary problem, as they expect underlying demand to pick up, and thus will seek to support a struggling business with time or funding to give it a chance to recover.
Even when management comes to accept that a company is failing, there may also be a reluctance to divest, as this is often felt by management to be a public admission of the fact that it may be difficult to face for reasons of pride. Again, management may wish to continue to support the business, although the arguments put forward for doing so will focus on the need to preserve confidence in the underlying business and manage its reputation, rather than the need to protect management’s egos.
As with many things in life, it’s not enough to make the decision to divest a side business, you also have to make it a reality, and implementing the divestiture may not be easy.
To get a sale, you must first find a buyer. If the transaction involved fails, this can be difficult, although there are networks of recovery capital investors who may be interested, as well as smaller acquirers like the example above.
Then the price and terms must be negotiated with the buyer. Many transactions fail at this point such as sales management:
• have an unrealistic expectation about the price;
• Going into the divestment process for strategic or non-monetary purposes, but then forgetting about these drivers in the process and trying to make it a cash-focused exercise, which can be a real challenge if the operation in question has little or no worth; Prayed
• fail to appreciate what the transaction looks like from the point of view of the potential purchaser who, for example, may have to take into account TUPE’s substantial potential liability in respect of employees acquired with the business.
So, if you’ve identified non-core operations that need to be sold, before proceeding, be sure to ask yourself what the key reasons are for this and the important goals you’ll want to accomplish by doing so, which will drive the choice. of method and approach?
