You’ve got your core business, but like an octopus it has arms spreading in all directions, holding other business segments or brands.
Divestment is when you eliminate some of these arms so that you can focus on your primary business.
There are many reasons to divest, it could be to merge, to get funds, to enhance stability or because of bankruptcy.
It could be to eliminate subsidiaries that aren’t performing or to comply with regulations. It could even be to break the business into sections that have greater value than the consolidated company.
Simona Hughes, financial counsellor with Financial Utilities and affiliated with The Carbon Group, says if some business segments are not congruent with the overall strategy of your main entity, then you can pass them on.
If it’s a business segment that’s profitable in its own right, you could sell it off.
The bigger you get, the more complex the operation becomes. But divestment is relevant for smaller businesses too.
Hughes says it is important to work on the 80-20 rule. Focus on the 20 per cent that is making money and then put systems in place to get someone else to manage it and then sell it.
For example, a 10-employee plumbing and gas installation business that wants to sell off the gas segment to focus on plumbing will need to look at its client base and see if there are any risks to selling off the gas side. Then look at how many staff are only working on gas.
“Is it a case that you can get the staff to buy the gas area, keep it within the brand and keep a profit share from that segment?” Hughes asks.
Here are some more tips:
- Run your numbers: Look at your projections with and without your business segment.
- Overheads: Look at the structure of your overheads. Consolidation will mean that overheads are being borne differently in your business. Will this make your core business more/less viable.
- Scenarios: Run different scenarios to see what the risks are and what your return is likely to be. Sometimes you can keep some of the equity in a business segment but relinquish control and responsibility.
- Impact: As you run options, look at which one is going to have least impact on the rest of the business. You want it to be smooth.
- Valuer: Speak to a business valuer and find the worth of the business you want to divest.
- Look to your networks: Who might be interested in buying it? Often you can sell some of the equity in a part of your business and keep some of the profits.
- Get help: Talk to a few people. Find a business valuer who knows your market well. Get your accountant or financial adviser to help. Also speak to your legal team because a restructure can cause risks. Consultants can help and they charge between $1500 and $2500 a day, depending on the complexity of the work. Hughes says look for quality in the work of a consultant because an experienced professional can probably knock a lot of the issues out and work through viable options in half a day. They can help you work out a plan, and then go from there.
