Frequently Asked Questions about Divestiture

What’s the difference between divestiture, carve-out, and spin-off?

In a divestiture, a company sells a line of business in exchange for cash or other consideration. In some cases, the company may choose to sell the division to management rather than going to market.

In a carve-out, the company creates a new company out of a subsidiary and sells or transfers shares to investors or perhaps to a management team.

In a spin-off, the parent company creates a new, independent company from an existing division or subsidiary. The existing shareholders receive shares in the new company on a pro rata basis and end up owning shares in two separate companies. The value of the separate companies is expected to be greater than the value of the original business prior to the spin-off.

When does divestiture make sense?

There are several scenarios in which divesting may make sense. If getting “smaller” in the short term can improve your long-term growth prospects, then divestiture is a strategic option to consider. For example, you may own a technology or product line that is highly valued by the market but is no longer contributing to your core mission.

What are common reasons to divest?

  • A company division or business unit is no longer aligned with the core business
  • Sustained lack of profitability, or margins continue to lag other parts of the business
  • Capital is needed to grow other parts of the business
  • Company is over-leveraged (too much debt)
  • A previous acquisition isn’t working out

It can be painful for an entrepreneur to sell part of their company in which they have invested so much time and energy. But in some cases, it may be a crucial step to reaching full operating potential.

How long does it take?

If you have already identified the buyer, a corporate divestiture can go quickly. However, most divestitures require at least 4 to 6 months, and some may require considerably more time.

How does one prepare for a divestiture?

Preparing for a divestiture is similar to getting ready for a merger or acquisition. The basic steps include:

  • Set your strategy and your goals
  • Put together a dedicated transaction team (internal resources, M&A advisors or investment bankers, legal, tax, etc.)
  • Identify what you are selling (and what you are not selling) and what you think it’s worth
  • Plan for the transition, e.g., what will change in the remaining part of your company and what does the buyer need to be successful
  • Build a target list of buyers
  • Engage with buyers and make a deal

What are potential deal killers?

Many things can kill a business deal in which the buyer and seller have distinctly different perspectives and goals for the transaction. Here are a few common deal killers for divestitures:

  • Unrealistic expectations (for valuations, timeline to complete a deal, etc.)
  • Not establishing mutual trust with potential buyers
  • Inaccurate information and lack of transparency – full disclosure is the key as negative surprises often kill deals
  • Adverse business conditions may cause the seller or buyer to pull out of the deal
  • Stakeholders not aligned and may not agree in the end to sell part of the company