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Divestment for Profitability – A Quick Guide for the Business Owner

By Analytix Editorial Team

July 10, 2019 0 Comments
Divestment for Profitability - A Quick Guide for the Business Owner

Divestment or disinvestment, also known as divestiture, can prove to be indispensable to businesses for optimizing their operating capabilities and maximizing returns. A Deloitte survey revealed divestiture expectations in the year 2018 pegged at 70%. This figure shows an increase for the year 2019 with more than 80% of the combined corporate and private equity respondents surveyed willing to sell units or portfolio companies in 2019.

However, while divestitures provide an opportunity to focus business attention on core competencies, they can hold up a business if not planned and executed effectively and professionally. To prevent this, it is critical to plan or create a sound strategy beforehand to leverage the momentum generated by the divestiture.

What Can a Growing Business Gain from Disinvestment?

Divestment can fulfill several goals for a business:

  • Divestitures enable businesses to add to their cash reserves through elimination of resources and assets that may be non-performing or obsolete.
  • A divestiture need not always be full; it can be partial where the business eliminates products, services, or assets that are no longer serving the larger business strategy.
  • Partial divestitures may allow a business to center attention and focus on its core services and help the business operate and perform better.

Divestments may fulfill the dual option of streamlining a business through a well-charted process involving trimming non-necessary assets, shifting the focus to core competencies, and helping add to the business funds through a judicious sale.

When is a Good Time for Divestment?

Choosing divestment for profitability is not a decision that can be made overnight. A divestiture can be a good decision for a business in some circumstances, including the following:

  • When a particular asset or resource is no longer performing or contributing to the business goals and its elimination helps the business.
  • If the business is in need of a cash inflow or debt burden reduction.
  • If the business is considering a merger or acquisition which may render an asset obsolete as a result.
  • If the business needs to declare bankruptcy.

Some of the reasons cited by the survey respondents for business divestiture, by percentage and year, are as follows:

Year Financial requirements, including raising capital for the business Technical reasons, including ridding business of obsolete tech or technology no longer needed Business strategy changes and modifications
2017 12% 15% 17%
2018 16% 16% 16%

 Choosing Divestment for Your Business

Before making the decision to divest, businesses must understand the implications for their business. This requires a thorough knowledge of the business’s existing resources, competencies, and bandwidth to keep pace with growth requirements. Identifying challenges is vital; whether it is non-performing assets, or increasing capital expenses, or the need to diversify.

Divestitures are complicated and involve surveys and strategy and a close and detailed study of transactions and figures before they can finally be executed. Consider the following:

  • To what extent will debt be reduced, if the divestiture is for financial purposes?
  • Will the process allow the company to retain cash in its balance sheets?
  • Will the proceeds enable any capital investments for the business?

 Divestment for Business Profitability: How to Go About It

Tracing balance sheets, conducting due diligence on accounting and financial numbers and operations, and determining the financial health of the business, from scrutinizing tax records for obligations fulfilled to a careful study of performing and non-performing assets: choosing divestment includes all of these.

In reality, divestment is a complex process from planning to execution. Reaching out to professionals helps ensure a fair business analysis that can identify and outline outcomes of the divestment before choosing to undertake it.

The actual process of divestment, surveying and creating a strategy before successfully executing it, requires professional due diligence that can take hours of time and attention of business owners otherwise engaged in business building activities or keeping pace with business growth. Beginning with sound bookkeeping and accounting practices is a good way to ensure a smooth divestiture.

At Analytix, our team of professionals is committed to helping businesses grow while leveraging their existing strengths and/or augmenting with our proven capabilities, wherever required. Our business analysis reports can help provide you with an accurate snapshot of your current financial position, thus helping informed decision making and cutting down on risks.

Contact us at 781-503-9004 or email us at [email protected] to understand more about how we work.

We’d Love to Hear from You!

How do you manage financial operations in your company and what are the steps you have taken to bring in profitability to the forefront? We would love to hear your views on increasing profitability in businesses!

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