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Colleen Cunningham
Sabine Vollmer

What to consider when you’re planning to sell part of the business

U.S. companies considering the sale of a business are increasingly shifting their focus from meeting financial needs to meeting corporate strategic goals.

February 7, 2013
by Sabine Vollmer

U.S. companies considering selling a subsidiary or portion of their business are increasingly doing so for strategic reasons rather than to improve their financial situation, according to a recent Deloitte survey that involved about 150 executives from companies of all sizes.

In 2010, the last time Deloitte conducted the survey, 46% of respondents said financial needs were the primary driver behind divestitures. By late fall of 2012 that number had decreased to 37%.

Eighty-one percent of the respondents said getting rid of a noncore asset was the most important reason for selling a business, up from 68% in 2010.

As attention shifts from meeting financial needs to meeting corporate strategic goals, Deloitte mergers and acquisition specialists said, executives need to make sure they are taking all the necessary tactical considerations into account.

“Using divestitures to advance corporate strategy demands careful financial analysis to prepare a deal for market, a clear communication strategy for disseminating divestiture plans to stakeholder groups, and a recognition of the need to be sensitive to employee morale during the process,” the report says.

The survey results suggested U.S. companies could do better getting ready for divestiture deals in 2013. Here are a few recommendations, according to Deloitte:

Develop a detailed separation plan. To raise the value of the transaction and close the deal faster, sellers should prepare carefully approaching a sale, including from the buyer’s perspective. The most important factors in picking a buyer were the highest price (76% of respondents) and speed and certainty to close (54% of respondents), according to the survey. But only 55% of the respondents said that performing detailed pre-sale due diligence is a key part of bringing a deal to market.

Keep morale among employees up. To execute the transaction, employees must stay motivated and companies need to retain executive talent. Ninety-three percent of survey respondents said keeping the morale up among employees in the for-sale business is a major challenge. But being aware of the challenge doesn’t mean companies do a good job addressing it when they plan a divestiture. Only 46% of the executives polled said they established a retention/incentive plan for the management of the business for sale.

Consider cross-border deals. A global perspective can result in more bidders and a higher deal value. The survey results confirmed that multiple, competing bidders are most likely to boost the deal value. Forty-four percent of the respondents said the value of their most recent divestiture was higher than expected because of competing bids. Executives of U.S. companies have historically preferred selling to domestic buyers, and 59% of survey respondents said they still do. But that is down from 70% in 2010.

Learn to manage the costs of transaction service agreements. More than half of the executives surveyed would prefer to avoid TSAs or do not provide them, but TSAs can be strategic tools to close a deal. For example, as sellers plan for the services they will agree to provide to a buyer, sellers may want to carefully think about which services they want to deliver and for how long, the Deloitte M&A specialists suggested. Finance/accounting and IT services are the most frequently offered in TSAs. 

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Sabine Vollmer is a Journal of Accountancy senior editor.