Raj Sharma, Director at ITOCHU and Corporate M&A expert based in New York.
C-suites often make strategic decisions to sell assets that no longer fit a company’s future growth strategy and might be distracting the management team from focusing on its core business. It is critical for the management team to prepare for a sale in order to extract the best value for the assets. Here are the top five things to plan for a successful sale of a non-core business unit of a company.
1. Have An Experienced Management Team In Place
When a large corporation is looking to divest a non-strategic part of its business, the pool of buyers will include other corporates in the same industry and/or PE buyers either looking for a new business platform or scaling existing businesses they own. While not all buyers may not be as concerned with there being a tenured management team, it will be crucial for many PE buyers.
Potential internal executives should be prepped for leadership roles, including CEO; and in case any capable functional heads cannot be identified, they should be hired externally at least six months to a year ahead of going to market. A strong management team can not only present the business in the best light but also expand the pool of potential acquirers to those who may not have an operational team that can manage a business on a larger scale.
Furthermore, selling a business is extremely demanding work, so having appropriate incentives in place for the key executives of the business to be divested is imperative. These executives will very likely also have to manage the uncertainty of leaving the parent company, and if they are not appropriately incentivized, their lack of commitment to the divestiture process will likely be reflected in their interactions with potential acquirers.
2. Involve Key Stakeholders Early On
Preparing a business unit to be a standalone business is a long, arduous process when there are extensive entanglements with the other business units in the organization. One of the biggest challenges is developing standalone financials for the business that can enable buyers to understand the performance of the selling assets alone. This requires clearly understanding the resources required to generate revenue as well as the costs for supporting that revenue.
It’s often the case that this business has been leveraging corporate resources such as finance, HR, IT, legal, etc., that will need to be accurately captured in a standalone P&L. In addition, there might be shared IP that both the parent company and separated business will use in their products and services post-transaction. Thinking through all these complex issues and then taking appropriate actions to reduce entanglements can take up to a year while also requiring involvement from the senior management of the parent company.
3. Manage Communication Effectively At All Stages Of The Process
Controlling communication at every stage of the process is critical to the success of the divestiture process. Early on, the parent company must weigh the pros and cons of going public with the decision to sell the business depending on the complexity of the carve-out.
While it can be highly distracting for employees to know that their jobs will be potentially acquired by another company, at the same time, it might be challenging for the parent to keep the information confidential as more and more employees and external advisors get involved in preparation for divestiture.
It is also important for the parent business to emphasize the benefits of divestiture to all the key stakeholders, including employees, customers, suppliers and the wider community. A new buyer with a better strategic focus and interest in providing resources can create significant value for the business and all the stakeholders involved. If the seller does not have a communication strategy in place, it can lead to significant attrition of employees as well as customers, which can substantially impact business performance and make the business less attractive to potential acquirers.
4. Think Through Transition Services Support
The greater the level of integration between the business to be divested and its parent, the more challenging it becomes to make the business standalone—thus, the need for transition services. The approach for this also depends on the buyer profile—a strategic or PE platform aiming to quickly integrate the business will require fewer resources, particularly for corporate functions.
Also, the level of entanglements and shared resources between the parent and the sub in areas such as product development, research, sales force, etc., will be the key to deciding the level of transition services. They are a drag on resources of the parent post-divestiture, and therefore, the seller has every motivation to keep it to a minimum, but being too reluctant to support the business after the sale will make the conversations challenging with any buyer. Try to strike the right balance and think early on about what you might or might not be willing to do.
5. Understand The Buyer Pool
It is imperative to understand what makes the business desirable for different sets of buyers. A strategic buyer looking to quickly integrate the acquired business will be more focused on overlap in product offerings and customers and will be willing to place a value on potential synergies of combining sales and back-office functions.
A PE buyer or a strategic buyer currently not present in the industry will be highly sensitive to the capabilities of the team to grow the business, the strength of products and services and the level of capex that might be required to scale the business to the next level. Sellers should engage with a different set of buyers with a highly tailored message based not only on the motivations of these buyers but also on the challenges these buyers would expect to face post-acquisition.
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