Effective Strategic Finance during Divestments

The decision to divest a business entity or other resource can be crucial and time-consuming for leaders, along with chief financial officers (CFO), to think over the scope and size of their portfolios, sunk costs, and the status of their strategic goals. However, after listening to all sides and making the final choice, leaders encounter an even more formidable task — implementing the divestment.

To effectively give up an asset, strategic finance management teams must orchestrate a set of crucial tasks and see through the lenses of external and internal advisers — existing employees, potential buyers, and boards of directors.

The Recipe for Success

Various Private Equity (PE) exits reflect that a battle-tested and replicable divestment playbook can help CFOs save their companies against considerable risks. Here are 5 key approaches that make businesses stand-out while carrying out successful divestments.

Determine the Strategic Grounds

CFOs must consider business’s active portfolio management as part of their strategy and regularly revisit the ownership of each business in the portfolio. To preserve a business, it must be both financially attractive and contain a comprehensive strategic course. Even if a business entity has immense potential, selling to a better-placed owner might build up value, provided that the valuation is lucrative.

Understand the Buyer Landscape

For every potential divestment, CFOs can conduct a holistic analysis of the buyer landscape, including local and overseas competitors, financial sponsors, and other strategic buyers. It can help strategic finance leaders better know the grounds for each buyer group and place the asset tactically, targeting buyers for whom the strategic value might be higher.

Sellers that can convey an asset’s value story to the targeted buyer group can pull out more value.

Refine and Prepare the Asset

CFOs must ensure that the business’s asset is as lucrative as possible before reaching out to potential buyers. This practice demands careful planning. For a corporation selling a business entity, includes operational enhancement, initiating processes and structures to enable easy separation of the entity from the rest of the business as well as understanding by the buyer with minimum disturbance.

Usually, PE companies start creating strategies to boost the pre-deal value 18 months before the said sale date and run parallel operations for strategic and financial shareholders. Also, they’re more likely to bet on resources that can be handled independently and have an in-built managerial layer to monitor everyday business processes.

Choreograph the Separation Procedure

This method — and the one that follows — might be best executed via an efficient and independent separation-management office (SMO), which plans the separation, identifies risks and complications, and manages the end-to-end deal procedure.

After identifying a priority bidder, the seller and buyer should immediately join forces to create a clear divestment blueprint that sets forth key responsibilities, timelines, and landmarks. Frequent and transparent interaction with all investors is critical throughout the procedure to avoid anxiety and ensure uninterrupted business momentum.

Disentangle to Support the Business

Interdependencies between the business getting sold and the remaining portfolio companies can be identified early, letting transitional service agreements (TSA) be designed in a way that prompts post-deal complexities. But, again, working closely with the buyer is typically the ideal approach to assuring a seamless handover process.

Final Words

Several business leaders and CFOs understand the importance of active portfolio management more than ever. Yet fulfilling the promise of divestments remains a tight spot for many. By following a practical and structured approach to assessing divestment candidates and opportunities, strategic finance leaders can significantly improve their odds of success and step their portfolios up a notch.

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