What happens when you hear a rumor or read an article about a company making a divestiture? Usually, the news is met with a scoff and conversation about the difficulties the divesting company must be having.
This is a flawed perception.
In fact, divestitures are an undervalued tool in the middle-market because, contrary to popular belief, they often spur long-term growth for the divesting company.
Here are a few reasons why you should shed your negative perception and embrace the benefits a divestiture can provide:
1. Eliminate extraneous responsibilities for leadership and employees
The more assets your company acquires or builds, the more people and time it takes to manage those assets, especially to make them profitable. An acquisition or the organic development of a new business unit can be necessary in the short term, but in the long term it may weigh down productivity.
Depending on your goals, maintaining a complex web of assets may not be the most prudent option. Instead, making strategic divestitures of pieces of your business portfolio that are neither essential nor optimal can relieve stresses on you and your employees.
2. Eliminate debt and/or expenses and increase capital
Running a business requires capital. Having an extraneous, unnecessary, or underutilized assets can hinder your growth capital or, even worse, be a drain on it. If you take careful steps to make that asset attractive to potential acquirers, you will not only relieve your company of the burden of maintaining it, you’ll also gain capital from the sale. That capital can be used to invest in higher growth areas of your portfolio which will ultimately increase your overall valuation.
This is a potent way to position your business for future progress. An influx of capital may be just the thing you need to make positive changes like strategic hires or improved technology.
3. Long-term growth
Speaking of the future, recent research has shown that companies that take responsible and focused action to divest actually outperform inactive competitors in the long run.
This is because holding on to a business unit can be extremely costly. As competitors struggle to prop up assets they don’t really need, wasting time and money, strategic divestors are able to shed that cost and ensure that the most important units of their business are able to grow to their full potential.
The Key is to Focus on Your Core Business
Too often business owners realize the folly of maintaining an asset too late because so much of their attention is focused on acquiring and building new business. They then act reactively, sell too quickly, and get a less than optimal deal. For this reason, you should be consistently analyzing your business portfolio to make informed decisions about where to invest and where to divest, keeping your core business and its mission at the forefront of your mind.
If you take this approach, you’ll be able to make much better, premeditated decisions. For example, a surprising option that we often look for when executing a divestment strategy is a corresponding re-investment in a higher-growth business more aligned with the company’s goals.
It’s not a far stretch to understand the positive impacts that good decisions like this can have. It simply takes the willingness to get past the negative emotions tied to divestment.
Our team specializes in working closely with middle-market companies to make strategic financial decisions, including divestments. If you are looking for sound guidance from experienced professionals to help you streamline and grow your business, contact us today.