Core and Non-Core Business – Is it time to divest?

Most companies are geared up to buy assets, not sell them; most acquire three businesses for everyone they divest. So, when they decide to sell, many do it at the wrong time or inappropriately. London is facing some challenging times with the constant discussions of Brexit and market uncertainty. Are we in, or are we out? What will it do to business? Quite frankly, we have seen a decline in the hospitality sector, and we have recently seen the numerous CVA's and restaurant closures of some big names, which is not helping the industry.

So, is it time to focus on just your core business? With these market changes, it would be wise to re-adjust the strategy to concentrate on your core business, reduce overheads and look at outsourcing where possible. As the economy slows, our business slows, and the ripple effect to our suppliers and third-party businesses also declines, which is the prime time to negotiate outsourcing contracts.?

Businesses that take a disciplined approach to divestiture sharpen their strategic focus on their core and create nearly twice as much value for shareholders. Divestments were once seen as a short-term tactical tool to raise cash or pay down debt. Today, strategic selling can create longer-term value and growth is better understood. Selling assets and re-shaping portfolios can help companies concentrate their core business and focus on higher-growth opportunities to create value for their stakeholders. If outsourcing practices are applied to the process in times of a tightening market whilst reviewing the strategic core of a business, one can achieve critical value. Returns from divestments are becoming increasingly important for boards and shareholders who demand strategic value.

Many businesses employ consistent practices around portfolio reviews ensuring successful divestments aligned with the business's strategic priorities. Selling can mean a short-term dip in top-line growth. However, redeploying and re-investing capital in core activities, expanding into new markets or developing new products can lead to longer-term growth and higher value.

While most agree on the importance of divestments, businesses often need help understanding how to invest in divestment proceeds. Discussions over business model integration are one potential source of tension. For example, in our company (NZR Ltd), divestment capital will be allocated to expand our core brand, Chotto Matte. With the six-year success of Chotto Matte London and our global expansion to Miami and, most recently, Toronto, we will continue the focus to expand the brand into North America and utilise divestment funds to do so, which begins to make much sense for stakeholders.

In addition to core and non-core businesses, I later discuss core and non-core activities. Determining which activities would benefit the company most when outsourced is crucial. In this context, core activities are strategic tasks that improve customer value and drive profits. Non-core activities are routine tasks that add little value and are not profit centres.

How to divest and what other steps to take

Re-organise the structure and build the core team:

In most cases, as in ours, managing multiple brands requires multiple resources. Marketing teams are more prominent, human resource requirements are more significant, finance reporting is more complicated, budgeting takes more time, and the list goes on; therefore, one brand and focus can reduce overheads. The plan to divest requires a strategy to retain a team of key players who solely focus on the core business and, in our case, also focus on the expansion of one brand.

An executive leads the most successful teams with the authority to make decisions and recruit or retain the appropriate professionals with diverse skill sets. The critical requirements of the executive team are Strategy to analyse financial and organisational information. Finance, to work on modelling, earnings, business case development and strategic options analysis. And HR, for the organisational understanding and to be well-informed on the pulse of the business.

Could you test the model to make sure it works?

Before divesting, test your financial model to see the results. By that, I mean you will see a decline in top-line revenue and an increase in cash flow from the sale of any non-core business; however, it will get you and your team thinking of where else the company can be streamlined. For example, can you reduce your headcount? What can you outsource? Where can savings be made with a smaller company??

It makes the most sense to sell a business. At the same time, potential acquirers can still extract value from the operations or the business unit. They can take steps to either reignite profitable growth or utilise the location for their business model. In the case of our restaurant group, selling off one of our single-unit brands to obtain a premium for the site will grant us a cash injection to use towards expanding Chotto Matte, or better still, converting one of our smaller brands to a Chotto Matte restaurant.?

One should apply two criteria to divestiture targets: fit, identity suitably, and value. To determine fit, the management asks: Is keeping the business essential to positioning the company for long-term growth and profitability? To judge value, the administration must decide if the business is worth more held in the company’s portfolio than anywhere else. By adopting the fit and value tests, companies become far more prepared to sell at the right time. The benefits of this approach are that divested assets usually fetch better prices because companies can sell on their terms.

Transparency to the team and presenting the logic of the divestment.

Communicate what’s in the deal for all involved. This entails having a detailed strategy in the future and a convincing and honest discussion with the key team members to disseminate the message to the whole company.

When a company divests, the doubts and uncertainty within the organisation most commonly surround the security of one’s position. If the company is selling assets, will I be made redundant? Is the company in financial turmoil? What will happen to the other brands? And the concerns go on and on. However, unlike many divestment scenarios and as mentioned previously, our strategic focus to divest is to continue the direction to grow Chotto Matte globally. With a keen interest in franchising in the Middle East, Latin America, Europe and Asia whilst growing company-owned stores in North America, the team will continue to grow. The difference is the focus on the core business model.

However, in other cases where companies are divesting to increase cashflow and reduce the company size, the people within the organisation must be presented with the company plan in a transparent and open format to ensure that the retainable team members are not left in limbo and begin looking for other opportunities. I was a witness to this during the 2008 global recession. Like most companies, the company I worked for at the time needed to reduce head counts. As the management required to be more transparent and open to the changes that needed to be made, many people departed before decisions were made. Others were left in a camp of uncertainty, which played a part in further declining revenues in the core business and retained businesses, as the culture of uncertainty affected the efforts and results.

Divesting non-core activities, not just assets

Further to the above point, you must also consider divesting non-core activities if you don't want to invest in assets without further growth. Outsourcing ensures best practices in key business components such as product supply, warehousing, logistics, marketing, HR, accounting and other vital processes. By divesting these non-core activities, companies realise that they can focus their energy on areas where they have a competitive advantage while differentiating themselves from their competitors and taking advantage of cost savings from the outsourced functions.

Earlier in the article, I mentioned that the declining hospitality sector in the UK leads to a more competitive third-party supply of products and services. Over the past ten months, as our strategy is being executed, I have seen PR companies becoming more competitive in pricing and offering. Some agencies are knocking on our door for business. As a result, suppliers are reducing pricing and likely taking a haircut on profits to retain business. In addition, these suppliers are offering solutions to outsource the production of certain items, such as raw vegetables, raw meat and seafood, to a standard similar if not better than what we can deliver in-house, with a direct impact on our business to reduce labour costs without compromising on quality.

Outsourcing the finance division is a crucial strategy for divesting the non-core activity. We can achieve the same level of reporting, accounting, and payroll practices as an in-house team at a 3rd?of the cost. In addition, many exceptional companies in our sector in the UK, such as Paperchase, can manage all the finance functions.?

As mentioned above, the increased focus on core business operations and developing competitive advantage has left companies wondering what to do with their non-core, less strategic processes. Although these processes are vital to the day-to-day operations, we view them as overhead functions that do not define their business and contribute little to their identity and bottom line.?

This notion, however, is changing as outsourced processes and supply help companies save money or increase productivity. In other words, a non-core business process may contribute to the bottom line by being outsourced.

Like many companies, we are currently determining which functions or processes are core to the business and which are non-core yet critical. Competition is driving enterprises to realise the potential benefits of outsourcing functions and methods to companies specialising in these areas. The total number of processes that companies consider core is inevitably shrinking. In contrast, the proportion of non-core yet critical processes will continue to expand as margins in a competitive environment are squeezed and customer service becomes increasingly competitive.

Make decisions and get on with it.

Many companies need to be more proactive when it comes to portfolio management and divestments: they need to review their portfolios more frequently and make decisions to?

I'd like you to please Take action based on the fit and value tests previously mentioned. Doing nothing in a fast-changing world is not an option. Instead, companies should consider whether those investments deliver the expected value or if capital could be better allocated elsewhere.

Reallocate capital to the core business – Assets and talents.

Once the strategy to divest is complete, please ensure that the capital is used to reinvest into the core business. A simple process is known as ‘dynamic resource reallocation’. It is about shifting money, talent, and management attention to the core business and where they will deliver the most value to your company. It’s one of those things, like daily exercise, that helps us thrive but that gets pushed off our priority list by business that seems more urgent. In this volatile business environment, resource allocation should be regularly adjusted. The strategic planning process needs to understand material uncertainties, both external (demand growth, competition, regulation) and internal (new technology, talent changes), and establish precise levels at which decisions on resource deployment would be revisited.

Conclusion

All else being equal, companies with more efficient capital allocation are more highly valued, whereas lower efficiency in capital allocation significantly reduces relative valuation. Companies are seeing more divestments as part of their growth and transformation strategies. A compelling portfolio review is based on an up-to-date definition of the core business, a precise model of where the company should focus its capital on reaching current and future market needs. The review itself should go then.

Analyse whether each business unit fits within that core strategy. Overarching business goals often stem from the desire to derive value. By divesting business units that are no longer strategically aligned or are not performing to expected market levels, companies can reallocate capital to higher-growth areas, helping them create a more focused, better-defined organisation that investors value.

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