Divestitures: Recognize the 3 Signs That Your Company Should Consider One

January 19, 2021

Divestitures get a bad rap because of considerable management hubris over the years. When business confidence is high and overly optimistic, egocentric managers splurge on deals that destroy value rather than create, only to later admit that they made a mistake in acquiring the assets. Divestitures only get more bad press when the assets need to be sold inevitably, often at a discounted price.

According to a study, when measuring total shareholder return, public companies that take part in focused divestment perform better than inactive companies by about 15 percent over a ten-year period. When focused divestments are combined with a repeatable M&A model, the number goes up to 40 percent, leading to double the sales and growth of profit.

In this piece, we’re going to discuss the signs that point towards making a divestiture. Take a look.

What is a Divestiture?

A divestiture is the sale of an asset belonging to a business, usually a factory, a subsidiary, or even intellectual property. Just as with acquisitions, businesses should always consider the value-generating potential of the transaction.

Signs That Your Company Should Consider a Divestiture

Here are some of the most telling signs that your company should be on track to make a divestiture:

1. Clearly Overvalued Asset

As a manager, you’re more familiar with the company’s prospects and immediate environment, and therefore, you should have a better understanding of the asset’s value than outsiders. When an interested party offers a price that is clearly above what you know its value to be, you should consider a divestment.

2. When You Have Options

This one is simple but will need good management practice on your part. You need to ask yourself two questions:

How would you use the cash that you receive from the asset’s divestiture?
Would your divestment strategy generate greater value for the company than holding the asset would?

While the answer to the first depends on where you decide to take your company, if the answer to the second is a resounding yes, then you need to divest the asset.

3. It Doesn’t Either Your Business Plans

Your company has a five-year business plan at any given time that directs where you want the company to be five years from now. While this often changes, it is definitely a useful layout that you can reference from time to time.

Divestitures are part of a rational business planning strategy. You need to consider your core and non-core assets over the long-term and focus on retaining the former while looking to move out the latter.

If you’re considering a divestiture or selling your business in New Jersey, South Carolina, Ohio, Massachusetts, Pennsylvania, Florida, Georgia, or elsewhere in the US, consider us at Gulfstream Mergers & Acquisitions.

We are an industry-leading M&A advisory firm and business brokers with a wealth of experience in the business of helping clients settle high-value mergers and acquisitions. Whether you’re looking to sell your business or to buy a business for sale, we maximize deal value and create lasting and positive relationships.