Operators Playbook; Divestitures 101
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Operators handbook; Divestitures 101
In a world where the average lifespan of a company in the S&P 500 is now down to just 18 years, it’s becoming clear that businesses can’t expect to last forever. Even when things are going well, companies need to plan for the future by constantly re-evaluating their business model and figuring out what “good” looks like.
Divestments can be done for any number of reasons. Sometimes, a company will sell assets to raise capital. In other cases, it’s more productive and financially prudent to sell part of a business than waste valuable resources on something that no longer fits with or serves your company.
Reasons to consider a Divestment?
Eliminate costs
When you divest, you free up capital and focus your energy on new initiatives while strengthening your core business.
Funds from divestiture can be put to work in areas that align with the long-term vision of the business.
Focus on core competencies
As a company grows and expands its product lines, it may face the problem of a lack of focus.
A divestiture can help a company regain its core focus and competence, allowing it to excel at what it does best.
How to execute a successful divestiture strategy?
Clearly define the scope
It’s critical to clearly define the scope of divestiture and what assets are to be included in the deal.
This could be related to the following; IT, customer contracts, operations, personnel.
Analyze the business unit performance as a stand-alone entity
As a seller, it’s important to understand the asset’s current performance and future value as if it were its own entity
This can be difficult given that the asset could be impacted by other areas of the business, leading to our next point;
Determine how much of the asset is tied up in the broader business
If you don’t properly understand the role of the asset within the broader business, you may soon realize that other business units can operate without the divested unit.
Transitional services agreements can help sellers understand what other business units with needed to be modified after the deal is closed
If you enjoyed learning about divestitures and want to learn more, make sure to check out the following below 👇
📚 Divestures and divesting strategy and execution
📚 Divestiture Provisions in Software License and Services Contracts
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End Note 🔚
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