Evaluate the Effects of Selling a Subsidiary or Division
During the best and worst of times, your company may be tempted to sell a division or subsidiary. This can make sense for a number of reasons, including:
The unit is no longer a core asset because your company has changed its strategy.
You need to generate cash to finance routine operating expenses.
Expansion plans require an infusion of cash.
The unit is underperforming with no foreseeable improvements.
Your company wants to streamline operations and reduce the overall complexity of its business model.
A lender wants full payment of a loan and you need to raise cash.
Regulators have fined the business or it is on the losing side of a lawsuit and you must liquidate assets to pay the fine or settle the suit.
There are several ways to complete a sale or divestiture. You can:
Spin it off as a separate entity.
Management can buy it through a leveraged buyout.
Sell it and close the business.
But before taking any action, answer these questions:
How will the sale change the competitive landscape? Often, a company is sold to another business in the same or similar marketplace. How will this affect competition? Specifically, will the acquiring business be in a better position to steal customers? Would the buyer capture market share in an area where you plan to expand your business?
What financial effect will the sale have? The financial implications of divestitures can go far beyond the money received. The sale may make your company smaller so it makes fewer purchases from vendors. That may mean an end to volume discounts. Lenders may also change financing terms, especially if the unit produced cash flow that was used to service all or most of the company's debt load.
How will employees handle the transaction? Change can be unsettling and morale might decline, which can potentially affect the company's performance. Once you have decided to sell, be sure to provide stakeholders with a clear, concise and accurate explanation of the plan, the reasons for it and the expected results. Provide the information to senior executives, employees, customers, suppliers and any others affected. Don't leave out any facts (except, of course, those that you cannot divulge under non-disclosure contracts). Holding back information can backfire, especially if stakeholders believe they were kept in the dark. Employees routinely discuss information that executives provide. Discrepancies can create angst and unnecessary distractions when the company can least afford them.
How will you protect intellectual property? During due diligence, potential buyers generally will want access to such intellectual property as patents, copyrights, trademarks and trade secrets, and possibly inventions that aren't yet patented. Sharing this information is risky, particularly when potential buyers are from overseas, where intellectual property theft is harder to detect and prevent. You can safeguard intellectual property in various ways, ranging from granting access only in the presence of a representative from your company, to purchasing digital rights software that prevents unauthorized sharing and printing of the information. Whatever solution is used, protecting intellectual property is crucial to preserving the value of your company's assets and commanding top dollar for the sale.
How long will it take to separate the technology of the unit and the parent company? Depending on the size of the unit, this may take considerable effort. For example, the buyer will likely ask for historical data pertaining to key back office functions such as accounts payable and accounts receivable. It is crucial that your IT department develop a roadmap. It may be necessary to augment your firm's IT staff temporarily to ensure the parent has the appropriate technology support.
Get your accounting firm and attorney involved as soon as possible. There will likely be volumes of paperwork. The sooner your attorney gets onboard, the quicker the legal aspects will start moving smoothly without hindering the sale process. Your accounting firm can provide access to a valuation specialist to help establish how much the business is worth on the open market.
Alternatives to Selling
Rather than selling a unit, there may be other options including:
Expanding by adding new products or services.
Forming a joint venture or strategic alliance.
Cutting costs strategically to increase margin while positioning the business for growth.
Closing the subsidiary temporarily or reducing product line to save cash.
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