Back to main

The Decision to Sell

It’s a rare pleasure to quote JFK in a business post: Victory has a hundred fathers, but defeat is an orphan.  Business leaders and notably corporate development officers put the vast majority of their focus into buy decisions and efforts.  This isn’t surprising.  An acquisition brings with it the hope of wonderful things.  Greater revenue and profit.  New and better products.  New markets and customers.  All the things that motivate a growth leader.  Divestitures are just the opposite.

While financial buyers are in the business of selling and view it as the culmination of their journey and hopefully the solidification of gains on investment, for corporates, the goal is to never sell.  Selling isn’t the culmination of the journey but an admission of defeat.  All the synergies we talked about never came to pass.  The great qualities of the acquired business have soured.  We missed things in diligence that turned out to be painfully impactful.  And more so than shutting down an organically grown offering, the sale of an asset previously acquired is a highly visible white flag seen by leadership, the board and often the broader market.

It’s no surprise that leaders hesitate to pull the trigger on divestitures.  Left to their own devices, the business sponsors for acquisitions will usually rather bury their mistakes, like a dog with a cherished ball, in the back yard and then use organic success to hide the smaller failures in their P&L.  Most divestitures are triggered by some kind of process that exposes the need to sell.  Sometimes it’s the standard strategy process refresh and sometimes it’s a corporate development review process.  Both the frequency of such processes and the pressure to act on recommendations, tends to increase in a challenging market.  When profits are up and growth is accelerating, skeletons are more likely to be allowed to remain in the closet.  Ironically, this is the antithesis of a price-maximizing PE process where you sell in a hot market and buy or hold in a weak market.  But for the corporate, there are broader financial forces and incentives at work.

This is not to say that every divestiture is a failure of the deal.  Many are the result of a shift in strategy at the parent that turns an on-strategy deal into an off-strategy problem.  Corporates are constantly evolving their strategies based on market forces, customer needs and their own leadership direction.  It is generally not productive to play the blame game on potential divestitures.  There’s always a lot of blame to go around but assigning isn’t particularly productive and actually creates an environment where people are less likely to be forthcoming with the benefits of selling.

So how does a well-meaning corporate development officer or executive trigger a sale process?  Generally it’s best to anchor on a broader strategic review process and to focus on the benefits of a sale rather than the sunk costs.  Key benefits to a divestiture can include:

  • Return of some capital which can be redirected to strategic growth.
  • Elimination of losses from unprofitable businesses
  • Removal of a distraction that requires management oversight takes up the sales teams time and focus and distracts enabling areas that need to support it.  All of these are particularly true for an off-strategy asset (which one of these is different from the others)
  • Short- or long-term ecosystem relationships with the buyer including:
    • Revenue from licensing retained technology or data.
    • Ongoing reseller relationship yielding very high margin revenue.
    • High margin revenue from transition services (also allowing time to right size or grow into – if needed – enabling areas teams)
    • Improved customer experience (even after you divest, the customer remembers you’re the one that sold you the asset so improvements in the offering and customer experience accrue to your benefit)
    • Reposition of top talent to running businesses that are on-strategy (subject to not stripping out critical team members needed by the buyer)

And all these benefits (except return of capital) increase substantially the smaller the business is.  Sub-scale off-strategy businesses pull an out-of-scale amount of resource and cause an oversized level of distraction.

Framing a sale around the benefits and improvement from current state (rather than anchoring to the original deal plan that hasn’t panned out) will be helpful to getting alignment around a sale.  Once everyone is aligned around the need to divest, it’s equally important to align around what you’re trying to achieve from a sale.  While financial buyers are almost entirely focused on sale price, for a corporate (particularly selling a sub-scale business) price is never the only, and often not even the primary, driver of value to the company.

Getting aligned on “what we’re trying to get out of this” before running a sale process will be key to success and leave the corporate development officer and selling GM free to drive a faster and more efficient process knowing they have leadership alignment around goals.

So when you spot an asset that needs to go, focus on the value creation from a sale rather than the value destruction from the original deal (and the blame that goes with that) and get everyone aligned on what you want to achieve.  Then you can get to work executing and creating value.