Gardeners prune constantly to promote healthy plant growth. Like a gardener, a CEO needs to continuously prune his business divisions and product lines to ensure the healthy growth of his company. A great deal of energy is often focused on acquisitions, but little attention is often spent on the importance of divesting or pruning a company's smaller non-strategic business units.

A recent article entitled "How the Best Divest" in The Harvard Business Review makes the point that there are appropriate times to prune plants and the same applies to businesses. Divestitures should be included as part of a forward thinking strategic plan, not as a reaction to hard times. According to The Harvard Business Review, "corporations that take a disciplined approach to divestitures not only sharpen their strategic focus on their core but also create twice as much value for shareholders."

Divesting to the Middle Market

Many small business units with sales between $10 to $150 million are often best suited as stand alone companies. For corporate parents, these businesses are viewed as management distractions, yet they continue to survive each year's budget cycle. They often have minimal to no strategic value to the parent company and are under-resourced and over-burdened with corporate mandates and initiatives. Their value is far greater to another owner.

Keys to a Successful Divestiture?

What are the keys to successfully divesting a division or product line?

· Know the Process. Many divisions or product lines are not divested because executives don't have the time, expertise, and resources to market businesses for divestiture. If that is the case, delegate this process to an outsourced corporate development professional.

· Prepare. Poor preparation and planning followed by subjective rather than objective valuations can also cause the divestiture process to fizzle. Get help planning the divestiture, preparing the right materials, and valuing the division or product line to be sold.

· Choose Your Approach. Using the wrong process can often lead to poor results. Many executives believe the "auction process" is the best way to get the best results. However, this process leaves too much room for debate causing lengthy transaction cycles. In our experience, a targeted process that matches the key value drivers of the division or product line to the needs of a short list of buyers usually results in the fastest transaction and the highest value. Consult with a corporate development professional to help you understand the pros and cons of each approach.

· Know Your Value. Last, many executives believe that you should not set an asking price for a business unit. In our experience, when a rational business valuation process is used, it makes sense to disclose the asking price. This Pre-Determined Value (PDV) approach eliminates the gamesmanship and blustering that often accompanies an auction. In our experience using a PDV can shorten transaction cycle time by three to four months.

MidCap Advisors Corporate Development Services

If you would like to explore divesting a business unit or product line contact David Gladden, Managing Director Corporate Development at 972.535.6417 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it to learn more about MidCap's corporate development services.