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What are the key factors that drive a successful divestiture?

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Divestiture is the process of selling or spinning off a business unit, asset, or subsidiary from a parent company. It can be a strategic decision to optimize the value, focus, and performance of the core business, or a forced move to raise cash, reduce debt, or comply with regulatory requirements. Whatever the motivation, divestiture is a complex and challenging transaction that requires careful planning, execution, and communication. In this article, we will discuss the key factors that drive a successful divestiture, from identifying the best candidates to preparing the deal documents.

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable…

1 Candidate selection

The first step in a divestiture is to identify the potential candidates for sale or spin-off. These could be underperforming, non-core, or non-synergistic units that do not fit the parent company's strategic vision, goals, or culture. Alternatively, they could be high-performing, core, or synergistic units that have a higher value as a standalone entity or under a different owner. The selection criteria should include financial, operational, market, and competitive factors, as well as the potential impact on the remaining business and stakeholders. A thorough analysis of the candidates can help the parent company determine the optimal divestiture strategy and timing.

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable Growth Driver
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Selecting candidates for divestiture can be driven by strategic or financial motivations or both. Divestitures can occur for various strategic reasons, including business units considered non-core or underperforming. Sometimes, the motivation for divestitures can be financial as well. A divestiture of certain assets (such as real estate, proprietary software, etc.) is motivated to take advantage of favorable valuation sentiment in capital markets and reward existing shareholders. Another motivation for divestiture may be to use the sale proceeds of a business unit for reinvestment in other business units or to reduce debt.

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2 Deal preparation

The next step in a divestiture is to prepare the deal documents and materials that will support the valuation, negotiation, and closing of the transaction. These include the carve-out financial statements, the information memorandum, the data room, the management presentation, and the sale and purchase agreement. The deal preparation process should ensure that the divested unit is presented in a clear, consistent, and attractive manner, highlighting its strengths, opportunities, and synergies for the potential buyers or investors. The deal preparation process should also address any legal, tax, accounting, or regulatory issues that could affect the deal structure or terms.

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3 Buyer identification

The third step in a divestiture is to identify the most suitable and interested buyers or investors for the divested unit. These could be strategic buyers, such as competitors, customers, or suppliers, who are looking for market expansion, cost reduction, or product diversification. Alternatively, they could be financial buyers, such as private equity firms, hedge funds, or family offices, who are looking for high returns, leverage, or portfolio diversification. The buyer identification process should involve a comprehensive market research, a targeted outreach, and a rigorous screening of the expressions of interest and indicative offers.

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4 Deal execution

The fourth step in a divestiture is to execute the deal with the selected buyer or investor, following a competitive and transparent bidding process. This involves conducting the due diligence, negotiating the final price and terms, obtaining the necessary approvals and consents, and closing the transaction. The deal execution process should aim to maximize the value, minimize the risk, and expedite the completion of the divestiture. The deal execution process should also maintain a good relationship and communication with the buyer or investor, as well as with the employees, customers, suppliers, and regulators of the divested unit.

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5 Transition management

The fifth step in a divestiture is to manage the transition of the divested unit from the parent company to the new owner or entity. This involves implementing the separation plan, transferring the assets, liabilities, contracts, and employees, and resolving any post-closing issues or disputes. The transition management process should ensure a smooth and seamless handover, minimizing the disruption and uncertainty for the divested unit and the remaining business. The transition management process should also monitor the performance, integration, and satisfaction of the divested unit and the new owner or entity.

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable Growth Driver
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Two practices stand out when for effective transition management. First, create a project management office (PMO) for divestiture. The PMO's charter is to execute on the divestiture transition plan. PMO team has stakeholders for various departments such as accounting, legal, operations, sales, etc., and as external experts. PMO teams generally meet weekly to review the progress of the divestiture transition and take corrective actions as necessary. Second, establish transition services for a mutually negotiated fee. Certain services, such as accounting, payroll, IT, etc., are continued by the selling entity. Customarily, service-level agreements outlining key obligations in each service area are stated in a transition services agreement.

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6 Value realization

The sixth and final step in a divestiture is to realize the value of the transaction for the parent company and its shareholders. This involves allocating the proceeds, repaying the debt, returning the capital, or reinvesting in the growth of the core business. The value realization process should measure the financial and strategic benefits of the divestiture, such as the improvement in profitability, efficiency, focus, and competitiveness. The value realization process should also communicate the results and rationale of the divestiture to the internal and external stakeholders, such as the employees, customers, suppliers, analysts, and media.

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Maulik Nagri

Experienced Finance Executive | FP&A Process Builder | Shareholder Value Creator | SaaS Finance Expert | Profitable Growth Driver
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The value realization outcome should be determined in advance of the divestiture. This determination helps with establishing a yardstick for the success of the divestiture. It also facilitates messaging with internal stakeholders (such as the Board of Directors, employees, managers, shareholders, etc.) and external third parties (such as customers, suppliers, regulators, analysts, and media).

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the key factors that drive a successful divestiture?

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1 Candidate selection

2 Deal preparation

3 Buyer identification

4 Deal execution

5 Transition management

6 Value realization

7 Here’s what else to consider

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