6 minute read 12 Feb 2019
How can you maximize divestment value from the next wave of buyers?

How you can maximize divestment value from the next wave of buyers

Authors

Paul Murphy

EY Asia-Pacific Divestiture Advisory Services Leader

Change advocate. Focused on due diligence and best practice divestment for large corporates.

Paul Hammes

EY Global Transaction Diligence and Divestiture Advisory Services Leader

Leader in transformational global divestitures. Catalyst for profitable growth. Innovator. Value driver. Passionate about diversity in business. Husband. Father.

Carsten Kniephoff

EY EMEIA Divestiture Advisory Services Leader

Dedicated advisor to transforming companies. Ambitious front runner implementing tech tools, new solutions for companies selling and separating. Enthusiastic and innovative. Fun-loving father of two.

Rich Mills

EY Americas Divestiture Advisory Services Leader

Leader of complex divestitures that help enhance shareholder value and drive more efficient capital allocation. Dedicated husband and father.

6 minute read 12 Feb 2019

Learn how sellers of a quality business can leverage divestment leading practices to achieve desired valuation. 

In a volatile marketplace driven by high valuation expectations, sector convergence and an abundance of capital — both private equity and corporate — who will be your next buyer? How will you anticipate the needs of different buyers and maintain competitive tension? What tools do you need in your negotiation playbook?

Expect wider price gaps

According to the EY Global Corporate Divestment Study, the price gap between what buyers and sellers expect has risen sharply over the past year. Sellers of quality businesses often value assets through a combination of improvements and projected earnings power, while buyers are inclined to calibrate against historical earnings to discount for short-term or unquantified risks while balancing their desire to stay in the deal process. 

Two-thirds (67%) of sellers say the price gap between what they expect to receive for an asset and what buyers are willing to pay is greater than 20%. In 2018, only a quarter noted such a significant gap. Now, more than ever, it is critical for sellers of quality businesses to build a credible value story with supporting data and start the related preparation early to achieve their desired valuation.

Leverage the power of private equity 

Appealing to private equity (PE) buyers sometimes requires significant time and effort, but these bidders can also bring sharper focus on value, increased competition and potentially higher multiples to the sales process.

Unlike corporate buyers, private equity may not necessarily have a portfolio company in which to integrate the business being sold. In the absence of synergies, sellers may find PE diligence demands to be more granular, and therefore time-consuming. Seventy-four percent of sellers say the increased amount of time for PE diligence requests was a challenge. But fulfilling these exacting requirements during negotiations can support a faster closing once the deal is signed. Forty-nine percent of sellers say that PE’s involvement in the divestment led to a reduced time to close. Reasons for a faster closing may be that: 

  • PE firms require fewer regulatory disclosures
  • They may already have expertise relative to a particular business based on ownership experience with an existing portfolio company
  • Their clarity relative to the exit strategy and related time sensitivity speeds up the process

There are other benefits, too: 38% say working with a PE buyer led to an increase in purchase price.

Sellers should take the following steps to maximize PE participation in a competitive process:

  • One quarter of PE firms say a well-thought-out stand-alone case and related cost model are key to keeping them in the sales process. Sellers may need greater flexibility in financial reporting systems as a first step in developing an accurate picture.

  • Missed forecasts concern potential buyers, particularly if the business misses forecasted performance outlined in marketing materials. More than a third (39%) of private equity bidders cite this as the most likely reason they would drop their price or walk away.

  • The nature and timing of an exit is of ultimate focus to PE. Sellers should articulate their perspective around potential monetization strategies early in the process.

  • Half of PE firms say access to granular data was a key factor in their decision about whether to stay in an auction process. The seller may need to have historical and projected information down to transactional and SKU-level detail, often monthly, and for as many as 10 years.

  • Tell a consistent story about financial forecasts, growth opportunities, capital requirements, the management team and the overall business going forward. These are focus areas to PE as they drive the financial and operational business models as well as the exit strategy.

Keeping PE engaged in the process can be vital to a successful deal. For example, a fifth of businesses say their last divestment ultimately lost value because they failed to maintain competitive tension throughout the deal process. Not articulating a clear value story, lack of adequate preparation for diligence requests and not fully understanding the buyer pool’s requirements (e.g., operational, regulatory, financing) can contribute to the loss of bidders in the sales process.

Use analytics in the sales process

When faced with widening interest from more diverse buyer pools — from PE to cross-sector corporates — sellers may benefit by leveraging analytics in the negotiation process. Advanced analytics can produce greater insight for buyers on the historical and future performance of a business while allowing sellers to tailor and strengthen their value story for different buyers. Only 39% of sellers say they used analytics during buyer negotiations, but 52% say it’s a step they should have taken. In doing so, sellers and buyers alike can avoid surprises leading to loss of value or cause the deal to fail.

Further, companies that use analytics in negotiations are three times more likely to achieve a higher sales price and increase valuation in the remaining business, as well as to close the deal faster, than those that do not. Additionally, use of analytics during negotiations can reduce the workload of the management team by anticipating buyer’s questions before they arise. This success can be attributed to providing buyers with the appropriate level of granular data that both satisfies their diligence requests and supports the value story. Also, use of analytics minimizes surprises and avoids additional time spent on negotiations relative to matters the company should have been aware of at the start of diligence.

Build value through stand-alone operating models

In carve-outs, buyers may recognize greater value by presenting a stand-alone operating model. In fact, sellers that present a business as a stand-alone are twice as likely to achieve a higher price and complete their deal faster than those electing not to do so. Buyers have confidence in the operating model and know that the business has been properly prepared for sale, with a comprehensive separation plan. Further, significant time is saved post-signing by not having to take these steps, long ago completed. This is critical to PE — 51% of PE buyers say it’s required for them to stay in a purchase process for corporate assets — as they often do not have the infrastructure or personnel to support a stand-alone business unless there is a match with an existing portfolio company.

Align on deal perimeter

Companies often ask us, “The deal perimeter simply reflects the business — why are we spending so much time on this?” The business to be divested is often defined differently by executives and functions within the organization. Too often, deal models are prepared utilizing historically generated system data that contains improperly allocated costs, excludes certain costs and does not reflect the business to be ultimately transferred. Accordingly, alignment on the deal perimeter across all functional areas, with a clear line of site to the deal model for each buyer, is critical. 

Leadership alignment around the deal perimeter — across RemainCo and DivestCo — is essential, but this is a challenge for 63% of companies. One common deal perimeter issue for sellers is deciding on the disposition of commingled manufacturing and production facilities. 

Sellers can improve alignment in deal perimeters by involving leadership early in the portfolio management process with the right data to inform decision-making.

Leading practices in the negotiation process

  • Ensure product pipeline and business strategy supports revenue growth projections. Develop a target operating model that identifies potential cost and revenue synergies available from combining the asset to be divested with the businesses of potential buyers as well as other value creation opportunities, such as changes to the country go-to-market strategy.

  • Bring the management of the business into the process at an early stage to increase divestment success. Seek their views on potential buyers, upsides that can be incorporated into the forecast and value story, risks likely to be discovered during diligence and how to deal with them, the likely go-forward operating model and how to anticipate buyer concerns. Consider “boot camps” that include executives and experienced deal professionals from outside the organization that have “been there and done that” to prepare management for successful meetings with buyers.

  • Evaluate how different divestment structures impact the business value from the buyer perspective and factor this into negotiations. Clearly identify and specify tax assets already available or triggered upon the divestment to allow the buyer to evaluate impact on the financial model and cash taxes.

  • Understand how different deal structures and perimeters may appeal to different buyers and consider dual tracking if necessary.

  • Make sufficient diligence materials available to prospective buyers who may otherwise identify opportunities to pay less.

  • Evaluate each key point in the negotiation process, its impact on the remaining organization and stakeholder value, and also determine “how far you are willing to go.”

Summary

To maximize value from the next wave of buyers, sellers should expect price gaps; leverage the power of private equity; use analytics in the sales process; build value through standalone operating models; and align on deal perimeter. Read the full Global Corporate Divestment Study (pdf).

About this article

Authors

Paul Murphy

EY Asia-Pacific Divestiture Advisory Services Leader

Change advocate. Focused on due diligence and best practice divestment for large corporates.

Paul Hammes

EY Global Transaction Diligence and Divestiture Advisory Services Leader

Leader in transformational global divestitures. Catalyst for profitable growth. Innovator. Value driver. Passionate about diversity in business. Husband. Father.

Carsten Kniephoff

EY EMEIA Divestiture Advisory Services Leader

Dedicated advisor to transforming companies. Ambitious front runner implementing tech tools, new solutions for companies selling and separating. Enthusiastic and innovative. Fun-loving father of two.

Rich Mills

EY Americas Divestiture Advisory Services Leader

Leader of complex divestitures that help enhance shareholder value and drive more efficient capital allocation. Dedicated husband and father.