Company Divestments

Divestment is a synonym for selling a business. This is the professional term used by the companies that provide professional advice so that our clients can sell while obtaining the best possible conditions in the transaction.

A divestiture strategy is a plan designed to facilitate and guide the sale or liquidation of an existing business. It consists of a set of decisions and actions that we consider necessary to maximise the company’s rank and optimise the sale process, ensuring that we achieve the objectives of the divesting owner.

Any divestment involves several steps. First, the buyer and seller agree on the basic terms of the transaction, such as the sale price and payment terms. Next, a due diligence or legal, financial and operational audit of the company is conducted to assess its current situation, risks and opportunities.

Once the due diligence is completed, the final terms of the deal are negotiated and a divestment contract is drafted. This contract sets out the details of the transaction, including the assets and liabilities to be transferred, the warranties and representations of both parties, and the closing conditions.

Finally, the closing of the transaction takes place, where the assets (usually the shares in the company being sold) are transferred and the agreed payment is made. Depending on applicable laws and regulations, it may be necessary to obtain additional approvals from regulatory or competition authorities before completing the divestment to the interested buyer.

There are different ways of calculating a company’s rank, but the most effective way is to use the Discounted Cash Flow (DCF) method of divestment.

It should also be noted that, when making the bid or offer, the buyer expresses the final purchase price with ratios or multiples, to be protected from variations in the magnitudes considered (EBIT, EBITDA, net debt, …) between the date of the offer and the closing, which can be many months away in time.

The offer is expressed using multiples, but the company valuation is made using the DCF method. Hence, the valuation and the price in the offer are determinable, not determined. Moreover, in the end, the absolute figure is determined at the time of sale or purchase, which is when you can really calculate the multiples implied.

The divestment or sale of companies is a strategic decision that owners of different businesses make for a variety of reasons, including the search for liquidity and investment diversification, changes in business strategy, taking advantage of growth or acquisition opportunities, or maximising value, among others

However, every situation is unique. Whatever your primary objective, we recommend that you seek expert advice from experts like us to follow the basic steps, make informed decisions and maximise the benefits of divestment.

Timelines for business sales can vary significantly, depending on a number of factors, such as the complexity of the business, the market in which it operates and economic conditions, among others. In general, the process can take from several months to more than a year.

This period may also be influenced by activities such as preparing the company for divestment, valuing the business, identifying and negotiating with potential buyers, conducting due diligence, drafting legal agreements and finalising the transaction.

For the shareholders, it is the way to capitalise the efforts made in and with the company for many years, generating a liquidity event that allows them to fulfil personal goals, including getting the funds for other businesses.

For the target company, a divestment from its shareholders, i.e., a sale to a new owner, is the right time to re-focus on its core operations, honing in on its fundamental strengths.

Shedding non-core assets, if that is in the divestment equation, empowers the business to allocate resources, management attention, and capital to areas that align with its long-term strategy.

This heightened focus can lead to improved efficiency, increased competitiveness and, ultimately, growth, driven by the new owner, that will get the return of his investment from the acquired company (the sole source that justifies the investment).

Furthermore, a divestment can trigger organisational changes. Employees associated with the divested entity may experience workforce restructuring, relocation or even redundancies, although in SMEs and non-listed companies is quite unusual.

Skilful management of these changes is vital to minimise disruption, maintain employee morale and ensure a seamless transition for all parties involved. For the employees of the divested company, it is an opportunity to advance in their careers many times.

For groups or conglomerates owning several businesses, the programmatic or regular divestiture of non-core or non-performing assets can unlock a range of advantages that pave the way for growth and success.

By shedding non-core assets or underperforming units, companies can focus on what they do best, amplifying their expertise and efficiency. This laser-like focus on core competencies allows for streamlined operations, increased productivity and a competitive edge in the market.

Divestments offer strategic alignment, enabling companies to align their actions with long-term goals. By divesting non-strategic assets, businesses free up valuable resources and capital to invest in areas that promise higher growth potential. This strategic realignment positions companies for improved financial performance, empowering them to flourish in their chosen niches.

Furthermore, divestments act as a catalyst for capital release. Selling off a business unit or asset injects a substantial cash infusion into the company’s coffers, in the holding company or at shareholders’ level. Also, these operations serve as a risk mitigation strategy, because companies can reduce exposure to potential risks and uncertainties.

On the other hand, divestments are not without their challenges. A significant disadvantage lies in the potential loss of revenue. And there is also a potential loss of margin, but the contrary is also true: many divestitures provide a way to get a liquidity event and to increase the group’s margin, getting rid of inefficient assets.

Be aware, on the other hand, that mishandling these transitions can disrupt operations, impact employee morale and maybe lead to customer dissatisfaction.