What Is Divestiture?
Perhaps your business is struggling financially, and you’re forced to sell off certain assets to stay afloat or to comply with a court order. Or maybe you decide to close part of your company in order to focus on your core business model. A divestiture can often help achieve these and other objectives. Below is an explanation of divestitures in general as well as common reasons and resources for beginning the divestiture process.
Divestiture in General
A divestiture occurs when a company disposes of an asset or business unit by selling, liquidating, exchanging, or closing it for financial, ethical, political, or legal reasons. You can have a full divestiture, where an entire business or product line is sold, or a partial divestiture, where only some assets are sold. If a small business is divesting, it’s often a full divestiture.
When conducting a divestiture, some common goals of the divesting company include the following:
- Maximize the sale price of the asset(s)
- Minimize disruptions to the retained business
- Keep the divested assets or businesses from competitors (even though this might mean turning down otherwise attractive offers)
- Sell a business or asset that can be operated by the buyer from day one (to maintain a good reputation as a business partner)
Reasons for Divestiture
Most divestitures occur for either financial or legal reasons. The decision to part with an asset or business is not usually made lightly, and some of the common reasons for doing so include the following:
- To remove an underperforming business unit from the company as a whole
- To let go of an asset or business that is redundant after a merger or acquisition
- To pay for or focus on other parts of the business that may be more profitable
- To focus on core objectives rather than remain overly diversified
- Because the company is more valuable without the asset
- To reduce debt
- If ordered to do so by the court (for example, because of monopoly/antitrust violations, or due to bankruptcy)
The consequences of a divestiture vary depending on the particular circumstances of the event. For example, a business unit that is sold to a larger corporation will be controlled by that corporation, while a business that is spun-off on its own will have many organizational, operational, and financial decisions to make to survive as its own entity. Regardless, there are many resources available to handle the issues that come up both before and after a divestiture.
For example, you may need investment banking services to ensure you achieve the best price for the asset. Similarly, the divesting company, the separated business, and the buyer may need business tax and accounting help to accurately report the divestiture to IRS and other regulatory entities. All parties might also need legal help to ensure the divestiture is handled appropriately according to federal and state laws, including bankruptcy laws if applicable.
Don’t Attempt a Divestiture Alone – Contact a Local Attorney
While a divestiture may be the right decision for your business, it can be difficult to manage the whole process. There are many financial, legal, and organizational ramifications to consider before, during, and after the event. An experienced mergers and acquisitions attorney can help guide you through the often-complicated process. To get help with your divestiture, contact a local business attorney today.