Non-Price Factors Influencing Divestiture Transactions Highlighted by Article

Jul 3, 2023

Financier Worldwide's recent publication highlights key considerations for effective divestiture transactions. Strategy alignment, cost savings, employee morale, customer relations, legal liabilities, and brand value preservation are identified as critical elements. Understanding and addressing these factors enhance divestiture outcomes beyond financial gains.

Guildford, United Kingdom - July 3, 2023 /PressCable/ —

Even though divesting business units has been a standard mechanism of strategic management for dynamic and consolidated companies for years, corporate sellers still face numerous challenges while executing the transaction. A recent article in Financier Worldwide highlighted the important non-price factors that parties involved in a divestiture transaction for a small-scale business must consider in order to achieve successful outcomes that go beyond just financial gains.

As stated in the article, subscale businesses may often fall short of expected cost savings and revenue growth, or they may not align with the ever-changing corporate strategy. According to research by KPMG, around 80% of acquisition transactions fail to bolster shareholder value due to lacking thought-out planning and execution schemes.

During the 2022 budget cycle, many corporate leaders placed a stronger emphasis on evaluating their portfolio and divesting non-core/underperforming businesses to streamline operations. While large organisations have the resources (such as bankers and advisers) in place for executing successful divestments, subscale businesses often struggle to divest cost-effectively. That said, factors like customer satisfaction, staff morale, legal liabilities, and operational efficacy often are the factors impacting the parent company’s selling decision.

Financier Worldwide marks employee morale as a significant factor in small divestment transactions: ”Current employees are likely to maintain contact with those in the divested business and how they are treated can have an impact on the morale of the employees retained. Beyond that direct impact, most companies have a standard of employee treatment they would like to extend for at least some time to employees who they hired but are now going with the divested business."

In addition, corporate sellers often aim to ensure that buyers maintain similar levels of compensation and benefits for transferred employees for at least a certain period to protect their former workforce.

Customer morale has been underscored as another critical factor, as the spinoff company often carries current customer contracts. Buyers failing to ensure seamless and augmented customer support may affect the broader relationship between the customer and the parent company.

Legal liabilities are another crucial factor demanding the special attention of corporate sellers. Divestitures typically involve legal terms, warranties, and compensations that may last for years. Lowering legal liabilities, even with a reasonable drop in the sale price, can be profitable for sellers, particularly in subscale business divestitures.

Preserving the brand value of the parent company may be affected by the divestiture, especially if it no longer delivers a specific service. Sellers may opt to represent the sale as a “joint venture” or highlight it as part of a broader business.

Finally, speed and efficiency are two crucial non-price factors sellers can’t overlook, says the article. Divesting a company requires the parent company to migrate resources based on strategic priorities. Financier Worldwide recommends sellers study long-term transition services agreements (TSA) to maximise the value of the transaction.

Divestment is a lengthy process in the M&A lifecycle involving a slew of steps. Being a highly convoluted process, carving out the IT assets of a business unit from its parent company requires expert supervision.

For businesses undergoing divestiture, hiring a high-end M&A and IT transformation service like Fission Consulting is a logical investment. Expert consulting services can mitigate investment risk and help companies make more informed decisions while significantly speeding up the separation timeline.

Financier Worldwide marks the importance of a balance of financial and non-price factors as key catalysts for a successful transaction. Although the deal price may be less significant in subscale transactions, factors such as preserving brand value, securing continuous revenue sources, and strengthening employee and customer relationships can greatly impact the overall success of the transaction.

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