Planning for a Divestiture: Strategic Wisdom for 2012

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Wading through the New Year’s breakthrough, celebrity-endorsed, ‘look like you’re chiseled out of stone’ weight-loss products is always a joy. With the DASH diet, ‘Biggest Loser’ cookbook, and BeachBody videos, I think this year’s offerings might have set a new world record. But now that they’ve subsided, perhaps it’s time to give their underlying basis some merit. Indeed, there is much to be said about an entity that sheds its unproductive flab, energizing its core and fortitude. Indeed, there is much to be said about a company that takes a realistic approach in re-evaluating its direction and making a conscious move to divest a business unit that simply does not provide the growth and draw anymore.

But divestitures are difficult. For years, there has been a stigma that selling an operation or a business unit was a sign of distress or financial hardship. And while this may be true in some instances, it’s just simply not the case for the majority of today’s transactions. Rest assured, potential strategic or private equity acquirers are cognizant of modern-day rationales. Companies start in particular directions and change gears. Others alter their course to pursue more profitable venues. In fact, most companies, at some point, need to radically revisit their trajectory. It’s just the reality of our fast-changing business world.

When you look at your company and lay out your next strategic business model, realize you are planning for the future. It’s good to think two years out; it’s great to think five. I know I’ve gotten on my soap box before, but the truth is that approximately 75 percent of privately owned label companies operate day-to day, following no long-term plan, growth, or exit strategy.

Divestitures are all about your future. They can position your company to create new value, improve margins, or open the door for greater opportunities. But, at the same time, since they are initiatives that permanently change an existing company, they are often more difficult to tackle than selling an entire enterprise. The original company must function better because of the divestiture and suffer at a minimum, if at all. You need to lose a spare tire; you don’t need to disengage a limb.

But just like any fitness regime, divestitures are difficult and require commitment to plan, execute, and maintain. You can divest a division today, but inadvertently add ‘pounds’ to ease the transition – thus finding yourself battling the bulge again a year down the road.

Each step in the planning, execution, and maintenance process requires a solid strategy. There is a great deal to consider, and it will take some time. As long as you’re proactive, you can effectively plan your divestiture now and stay in control of the process. If you think you should consider a divestiture, don’t wait. Even the most tenured, powerful companies can be destroyed by delays in getting rid of extra baggage. Consider our friends at Kodak – a 100+-year-old business. Its hesitance in getting out of unprofitable segments and reframing their future will likely be the cause of its imminent demise.

This article thus focuses on the initial process. Here are five tips to help you ‘plan.’

1. Understand Your Business

Understanding your business is about envisioning its growth. You know your customers, your people, and your product lines. But do you know which ones are really growing your business? For most businesses, 20 percent of customers account for 80 percent (often more) of revenues – and it is likely that only 10 percent of customers are actually profitable to you. Most of the time when we meet with clients, we find that their companies have never really evaluated their ‘best’ customers or segments. Surprisingly sometimes, they find out their top-revenue customers are their least profitable.

Forget what you think you know about your company, and perform a thorough financial analysis of your 20 largest accounts. Where are you making the most money? Are any vertical markets particularly lucrative to you? What types of products are bringing you the greatest margins? You cannot make a move to divest any operation without first knowing what is truly valuable to you.

2.  Develop a Strategic Plan and Long-Term Direction

Far too many label companies – entrepreneurial and large alike – fail to create and follow a real strategic plan. We had so many years of fruitful business that we didn’t have to worry about longevity. Smaller business leadership often are so wrapped up into day-to-day minutia that laying out a long-term vision falls by the wayside. Now more than ever, it is imperative you have a solid plan. Delve into your customers, products, market data, sales strengths, geographic territories, and other assets. Determine what is in place and what is missing. Then take a look at where the label business is headed in general. Are you on track for long-term growth? What are you doing to position yourself for emerging trends and markets? Don’t be afraid to enlist an advisor to help you create your plan. An outside perspective of your markets and trajectory can be extremely beneficial – in any situation or economic climate.

3.  Determine What to Divest

Perhaps the biggest challenge is determining what to divest. As they say in the M&A business, you can sell your company only once. Certainly that sentiment holds true in the sale of a business unit as well. Customers can accept your choosing to move out of a segment, but if you try to re-enter it, you will be viewed as disjointed and unfocused.

There are a few things to consider. Your wisest bet is to rigorously – and honestly – evaluate your entire operation and see what you are okay with losing permanently. There may be a few targets you will see right away. For everything else, evaluate them from the vantage point of the future.

A proactive sale of a unit that is currently profitable but not taking you where you want to go can be ideal. Its track record and performance will be attractive to potential buyers, and if it aligns with their business model, you’ll be able to sell it at a good price.

Likewise, a division that may be a ‘dud’ for you may be a goldmine for someone else. For example, if you control a good portion of work in a certain area – and it’s not very profitable or aligned with your long-term plan – it could be a good divestiture target. With you exiting the segment, another company may see it as an opportunity to increase their share and dominate that particular market.

In either instance, you’re creating a win for both buyer and seller, a factor that results in the most successful divestiture transactions.

4.  Assess the Impact of the Divestiture

Once you’ve identified the portion(s) of your business that might be good spinoff candidates, review how their absence will affect your core operations and position in your segments. Will key technologies, patents, or assets be lost in the sale? Will any products and services central to your future vision be displaced? Will you lose purchasing power or good standing with any customers?

Likewise, if you’re spinning off a self-contained plant location, think through its interaction with your central operation. If the target division owns/houses your systems, human resources, or financial activities, what will it cost you to replace? Investments to account for a divested function, personnel, or market position can outweigh the value and objectives of a divestiture quickly.

5.  Prepare Your Company

Like a real estate transaction, you need to fully prepare your intended divestiture to ‘show’ positively – yet accurately – to potential acquirers. Conduct your own due diligence and evaluate it from a buyer’s point of view. Get rid of superfluous or old equipment that has nothing to do with its operation. Prepare financial statements for the unit as its own separate entity. And start separating its operations from the collective enterprise.

Like integrations, divestitures will have adjustment pains and require a logical action plan. Be prepared for the unexpected and be open to the possibilities. A well-managed divestiture will not also help you shed those extra inches; it can be a good source of funding for future growth. Ironically, the goal of any divestiture is to gain more than you lose.

Navigating the divestiture process can be tricky. Enlist outside counsel and advisors as you need them. Either way, the planning you do is crucial. It is your key to creating options. Success in times like today requires wisdom and flexibility. Preparing early will enable you to find the best buyer, retain the most negotiating power at the table, and realize the greatest value from your divestiture.

About the author

Bob Cronin is managing partner of The Open Approach, an investment banking/M&A firm focused exclusively on the world of print. The firm's proven results have made it the exclusive member-recommended firm of PIA/GATF and IPW. For more information, visit www.theopenapproach.net, email Bob Cronin at bobrcronin@aol.com, or call +1 630 323 9700.

This article was published in L&L issue 1, 2012

Bob Cronin

Bob Cronin

  • M&A columnist