Divestiture strategy

Strategic choices that protect the value of your enterprise.

Getting paid for the PAST, not the FUTURE

Often, when inexperienced sellers negotiate the sale of their company, they base valuation discussions on the historical performance of their company. While the historical performance of a company is important, the future earnings and potential growth of the seller is more important to the buyer.
During the M&A process, it is therefore important to base valuation discussions on realistic future cash flows and earnings of the business.
After all, buyers are not paying for past financial results, but instead the value they can derive from that business in the future.

Selling to the wrong buyer

Often, private companies will sell to professional or personal acquaintances, including employees, family members or competitors.
However, these sellers fail to recognize that premium buyers often come from unlikely sources, locations or industries.
Acquisitive premium buyers exist that actively purchase companies to sustain earnings growth.
Without running a comprehensive and thorough buyer identification and solicitation process, sellers that fail to retain an advisor often forego the opportunity to engage premium buyers.

In M&A, timing is everything. Selling a company at an inopportune time can result in leaving significant money on the table.
Key factors when considering M&A timing include the economic climate, the overall deal climate, interest rates, as well as the current tax and regulatory environment.

For many business owners, selling the company is a once-in-a-lifetime event that they are not properly prepared to handle. What’s often missing is effective planning – laying the groundwork that can create value and help ensure that the owner clearly sees the current and future situation and creates succession strategies accordingly.
So why don’t business owners plan effectively for ownership succession? The problem is many owners don’t look at their business as an investment. They’re too emotionally involved, and that makes it difficult for them to understand the value of the company and to plan for how to maximize the financial payback.

The key question is when is the right time to start planning for ownership succession? A business owner should always be planning for succession.
If a business owner treats the business as an investment, planning for the liquidity of that investment is always prudent. Advance planning opens up your options and lets you make smarter decisions regarding the value of the company.

Planning can entail a detailed needs analysis and development of a strategy to ensure optimum results. The key decisions and key initiatives should be geared toward improving the company’s value and its marketability.
An early question you should ask yourself is, What is the market for this type of company and what do I need to do to capitalize on this market. Unfortunately, many business owners are too keyed in to the daily job function and don’t focus on building value. So that makes this planning more difficult.

You need to look at your business by considering what is salable. Investors are always concerned with the transportability of the business – can they operate it as effectively as the current owner. This is one of the most crucial areas. One of the best things you can do is build a strong management team under the owner, which will broaden the market for the company.
You need to show that the business can carry on without you while keeping cash flow predictable. You won’t have a lot of potential buyers if you don’t have a management team that can keep the purchaser’s investment stable. The deeper the bench, the less concern the buyer will have regarding this.
Along the same lines, as they get nearer to selling the business, owners should make themselves as unimportant to the daily business as possible. Put others in charge of daily operations and customer relationships. Again, this is a way to create a portable business.

It is important to work with an advisor with specific industry expertise. This allows them to understand what drives value in a certain industry and they can communicate the unique value of the client versus other players in the industry.
They will know which investors or buyers are seeking positions in the industry, and they may be familiar with certain buyer tendencies. They can identify these issues much better than a generalist can.