From an operational perspective, separating a business from its parent involves four critical time periods:
In the pre-signing phase, when the buyer’s identity is still unknown, it makes sense to develop an employee communication plan and to identify key personnel to retain.
In the pre-closing phase, when the seller knows the buyer’s identity but the deal has not been finalized, the seller should work through operations-related details: whether and how much to build inventory in advance, for example. Reverse-supply agreements may have to be negotiated if the seller still needs the divested business to supply its products.
In the stabilization phase, as processes migrate to a stand-alone status, care must be taken to ensure that business activities continue uninterrupted. Lacking a comprehensive stabilization plan, a buyer’s Year 1 financial forecast may fall short.
Independence describes the moment when the spin-off or carve-out is operating on its own and no longer depends on the former parent. Buyers typically view long stabilization periods as adding risk.
Sellers need to analyze these links in the value chain and take action to help prevent their stand-alone business model from deteriorating:
- Sales and marketing: Would the company benefit from expanding into new sales territories? Hiring or letting go of sales people? Investing in new IT or automation?
- Manufacturing: Can plants be consolidated or production outsourced to a third party?
- Distribution: Does the company need its own storage warehouse?
- Finance and accounting: Would it be cost-effective to outsource and offshore accounts receivable and cash management functions?
- Treasury: Can several regional bank relationships be consolidated?
- Human resources: What is the right benefit and compensation program to meet the needs of the smaller stand- alone business?
- Procurement: Can the process be rationalized?
- Tax: Can tax efficiency be improved by restructuring holding companies or other legal entities?
Seller should begin developing the operational continuity strategy at the earliest sign that a divestiture is contemplated.
Operations are the heart of divestiture value. While preparing for a sale, sellers must retain focus on the business and plan a smooth transition to a new structure.
- Pay attention to operational issues at every stage of a divestiture
- Develop a detailed stand-alone business model, reflecting the carve-out’s future full cost structure. Such models enable buyers to value the business, while helping sellers rationalize their own value chain.
- Develop a realistic “order-to- cash” blueprint early
- Many months may elapse from the moment a transaction is first contemplated to the time a purchase agreement is struck. During this interval, an intense focus on the quality of operations is crucial to maximizing deal value and minimizing sellers’ risk. More often than not, the true drivers of value are organizational know-how, managerial capabilities, employee engagement, customer relationships and brand equity.
Many sellers get so focused on the deal itself, or on post-divestiture life, that they begin to overlook the daily matters of the business. In so doing, they may take their eyes off the ball, causing disruptions and operational missteps that contribute to lower valuations and larger post-closing adjustments.
Following are some leading practices for operational effectiveness in divestitures, especially carve-outs:
Recognize that value erosion is tied to operations
Too many sellers see the divestiture as a sale of fixed assets and not as an ongoing business whose value depends on stability. With senior management engaged in the deal process, it is essential to devise a strategy that promotes operational continuity and interim performance throughout the entire divestiture and even post-close.
Integrate deal strategy with operational strategy from the start
Ideally, sellers begin developing the operational continuity strategy at the earliest sign that a divestiture is contemplated. The operations team — typically a mix of corporate and business unit managers — should begin assessing the risk to operations and asking how these can be avoided, mitigated or transferred. Buyers of a potential carve-out typically will ask how managers plan to make the business stand alone.
In a divestiture, employees can expect changes in everything from reporting relationships to job responsibilities to business processes. There are potential implications for suppliers, customers, partners and other stakeholders. It is incumbent on management to anticipate operational risks well before those risks become disruptions that reduce value. Having action plans to address such risks, and effectively communicating them, can demonstrate operational control during the distracting deal process.
Develop a stand-alone business model
This series of calculations shows “what’s in and what’s out” of the transaction: which sales offices, vendor contracts, employees, factories and so on will migrate to the new entity. Sellers must calculate clearly to avoid inadvertently lowering the value of the business.
Strengthen the value chain
Developing a stand-alone business model requires sellers to examine each link in their value chain to see if they can take some operational step to enhance value or to keep it from eroding.
Operationally astute companies examine their supply chains to consider how they can be improved, identify which assets add most value and, in general, figure out what the business needs as opposed to what it’s used to having. Acting on this analysis can help sellers improve balance sheets and income statements.
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