A business divestiture refers to the sale of assets such as product lines, subsidiaries, business properties, or an entire company.
Find out more about business divestiture and why it is used.
What is a Business Divestiture?
A business divestiture is when a business asset is sold in the hope that someone else will be able to buy it for more than it was worth to the business. It is a way to raise cash, eliminate waste and make a company more competitive in the future.
How does business divestiture work?
Perhaps your company has a product that isn’t generating enough revenue. Instead of throwing it away, invest more in marketing and finding the right customers. It is often a bad idea to invest more resources in something that is clearly not working.
You might instead consider selling the entire product line. You can stop wasting marketing dollars, reduce production costs, and eliminate holding onto inventory that isn’t moving.
Although it may seem like a loss at first, the end result is a net benefit. You can free up resources and time to concentrate your business on what your customers want and will pay for. This can increase your bottom line and add value to shareholders. 3
You should not make business divestitures in desperate situations but as part of your ongoing financial planning process.
Types of business divestitures
Assets are often disposed of by businesses for many reasons. The following are some of the most common reasons businesses sell assets:
Getting cash. Sometimes a business might decide to sell its property in order to resolve a cash flow issue. A business might need money to buy or license equipment or intellectual property (copyrights, trademarks, or patents) it has.
Selling subsidiary. Some companies have created subsidiaries from smaller businesses. If the business feels the subsidiary is not performing well, or if it doesn’t work well with the rest the company, selling or spinning off a subsidiary may make sense.
Selling underperforming assets. The most common type of business divestiture. The most common asset to be sold is a product or service that’s not performing well. There will always be better products and services than others. You can focus more on the services or products that work and make the most profit by getting rid of the ones that don’t.
Closing of locations. Sometimes, a company grows too fast and adds too many locations. Sometimes it is necessary to close certain locations if customer demand isn’t sufficient to pay expenses.
Bankruptcy. Many businesses that are going through bankruptcy will need to sell a portion or all of their business. Chapter 7 is one type of bankruptcy. Chapter 7 bankruptcy refers to the liquidation (sale) of a business and its closing. All assets of the company are sold in this process. Some assets may be liquidated in other types of bankruptcy (e.g. Chapter 11 reorganization).
Business sale. The sale and close of an entire business can also be included.
Is business divestiture worth it?
Unless you are forced to do so by bankruptcy, you can decide what and when to divest. These are the steps you should take if you are thinking about divesting.
Think about assets. Take a look at the balance sheet’s asset side. The assets that are closest to cash (called current assets), can be sold the fastest and most easily.
Calculate your break-even. Perform a break-even analysis of assets, products, and locations you are considering. Is your product close to breaking even? You might need to hold on to the product if you are close to breaking even.
The product’s lifecycle is important. The product’s lifecycle describes the progression of a product from its introduction to maturity, growth, decline, and maturity. It is best to dispose of a product when it has reached maturity.
Evaluate your profitability. Analyze the profitability ratio of specific products and parts of your business. Gross profit margin is a good measure of profitability. It compares gross profit to sales volume. Gross profit margin is a measure of how profitable a company is.
Think about the future. Take into consideration temporary and permanent issues. Selling something that can be permanently removed from your company may not be the best way to solve a temporary problem. It might not be the best solution to a temporary problem by selling something that will never return to your company. 4
All of this analysis will help you identify products, services, or parts of your company that can bring in the most money from the lowest-performing assets. It’s not a good idea to sell something that’s performing well. But, you can’t lose much if it’s not. When deciding on your next steps, it’s important to consider this tradeoff.
