Introduction
In the lifecycle of any business, selecting the right exit strategy is crucial for any business owner to transition out of their business and realise the value of their investment. This requires consideration of current market conditions, legal compliance and stakeholder interests. However, every situation is different, and unique circumstances must be considered to ensure a seamless transition and the business’s long-term future.
Among the various options available, divestment of ownership as an exit strategy is a commonly used form of transaction and a strategic choice worth considering. This article primarily delves into full divestment as an exit strategy while also discussing the consideration of partial investment to access capital.
What is Divestment?
Full Divestment
Full divestment entails selling the entirety of the company’s ownership stake, meaning a complete transfer of control and ownership rights to the buyer.
While relinquishing full ownership provides immediate liquidity and potential returns on investment, it also involves severing ties with the business and surrendering control over its future direction and operations.
Consequently, thorough consideration of the long-term implications and strategic objectives is essential when contemplating a full divestment, as it represents a definitive transition in the ownership structure and governance of the company.
A recent example of divestment is the sale of 7-Eleven’s Australian arm to its Japanese Parent Company late last year. The Wither and Barlow families have led the company since 1976. Russel Withers stated on behalf of shareholders that “now is the right time for our families to pass the business to new owners to continue to build and develop this wonderful brand.”
Partial Divestment
Partial divestment involves selling a portion of the company’s ownership stake, where the original owners can stay in the business while raising capital. This provides the company liquidity while allowing the original owners to retain some control and involvement in core business operations.
With only a partial ownership stake, the company can raise capital to fuel growth initiatives, fund expansion projects, or address financial obligations without relinquishing complete control over strategic decision-making.
What is the Process for Divestment?
1. Planning and Strategy
Planning and strategy are the cornerstone of a successful divestment process, starting off with a comprehensive review of the current business landscape and the strategic objectives of the owners and management.
This involves considering the trajectory of the business unit across both short-term and long-term horizons. Understanding the business’s position in the market and financial health would further inform business owners of the right divestment strategy.
It is also imperative to identify the motivations for selling a business and begin detailed planning to set clear objectives, timelines, and milestones for the divestment process.
2. Identifying Potential Buyers or Investors
The next step would be to identify potential buyers or investors interested in acquiring the ownership stake.
This starts with conducting market research to understand the landscape and identify potential targets, aligning with any preference from the current business owner regarding who they would prefer selling to across private investors to public entities.
Targeted outreach and marketing efforts would attract potential buyers and generate interest in the divestment opportunity. In this process, confidentiality agreements may be utilised to protect sensitive information during the initial stages of discussions.
3. Comprehensive Business Valuation
The focus shifts to business valuation once potential buyers or investors are identified.
This involves thoroughly analysing the financial statements to understand earnings generated, capital structure and future growth potential.
The business’s intrinsic value would be assessed through a discounted cash flow (DCF) model, which takes the sum of future cash flows and terminal value, with a discount rate applied, typically the weighted average cost of capital (WACC).
On the other hand, comparative valuation would reflect the value of the business in the current market, considering multiples paid for current deals, typically sale price over earnings before interest, tax, depreciation and amortisation (EBITDA).
4. Negotiation and Deal Structuring
With a clear understanding of the business’s value and how much similar businesses are being sold for, negotiations with potential buyers or investors can commence.
Discussions will take place over the terms of the divestment, including the purchase price, payment structure, contractual obligations, and any contingencies or warranties. The aim is to reach mutually beneficial terms for both parties while mitigating risks.
Deal structuring would entail exploring various sale options, such as asset sales, stock sales, or mergers, and determining which approach would be most suited to the circumstances.
5. Due Diligence
Following preliminary negotiations, the buyer would then conduct due diligence to scrutinise the financial, operational and legal aspects of the business being sold.
The potential buyer would examine the business to verify the quality of operations, growth prospects, and the veracity of advertised materials. This would also identify potential risks or liabilities and check for any hidden issues that may impact the transaction’s feasibility or valuation.
6. Execution and Closure
Upon finalising transaction terms and completing due diligence, the divestment enters the execution phase.
Legal documentation will be drafted, reviewed, and executed, formalising the transfer of ownership stake. Additionally, any regulatory approvals required are to be obtained to ensure compliance with applicable laws and regulations.
The transaction would then culminate in a closure with the transfer of funds and formal transfer of ownership, marking the conclusion of divestment of ownership stake.
How Greenwich Capital Partners can help:
Poor exit planning has consequences, which can be both financial and personal, and the skills required to sell a business are much different to those needed to operate it. Attempting to navigate this complex landscape without guidance is akin to driving blindfolded. However, with Greenwich Capital Partners at your side, their extensive industry expertise is a guiding light, illuminating the way forward and steering you toward success.
Greenwich Capital Partners offers a range of strategic and capital advisory services, including divestment of ownership. They have the industry experience to decide if this is the best option for the business at hand. This involves reviewing the current business strategy, sale motivations, key drivers of the business, and the current market and understanding how these factors could affect the sale.
Prior to commencing the outreach and negotiation process, Greenwich Capital Partners sets businesses up for success by aiding business owners in determining what information needs to be prepared to meet the needs of buyers and their financing sources.
The team at Greenwich Capital Partners brings its wealth of industry experience and diverse expertise in building valuation models to inform the current value of the business and set expectations for the fair value price. The expectations set by intrinsic and comparative valuations effectively provide guidelines for negotiations.
Q&A
Who could potential buyers be?
Different buyers span from private investors to public entities, and it is essential to understand that each holds distinct motivations and priorities. Evaluating the synergy potentials between the buyer and the asset is crucial in identifying suitable buyers and ensuring the medium to long-term continuity of the business. Private Equity (PE) firms typically seek businesses with potential for optimisation or market growth, aiming for profitable exits.
On the other hand, strategic investors may prioritise factors such as acquiring new clients, expanding into different geographies, enhancing technology or product lines, and strengthening their competitive position in the market. Joint venture partners may be interested in opportunities for mutual growth and risk-sharing. Other investors considering IPOs or demergers would be keen to understand how funds will be utilised to drive shareholder value.
How do I know when the right time to divest would be?
The right time hinges on a confluence of factors, such as business growth trajectory, current market conditions and internal readiness. Closely monitoring indicators such as industry growth, competitor activity and economic conditions can inform of optimal exit timing. Internal considerations include key milestones regarding financial performance, as well as team preparedness. A successful exit must balance avoiding premature exits and seizing peak market opportunities.
What are some potential challenges?
Ensuring alignment between buyer and seller expectations, addressing potential disentanglement issues, and maintaining business continuity throughout the transition process can be potential operational challenges. Regarding partial divestment, a study by EY found that 8 out of 10 companies didn’t meet price expectations for divestitures. Divestments can underperform when treated as one-off decisions based on short-term financial factors rather than being closely aligned with the overall corporate strategy.
