Five Ways to Maximize Post-Close Divestiture Value
For many companies, the COVID-19 crisis has resulted in significant liquidity pressures and a sudden decline in EBITDA, forcing many to divest or carve out their noncore entities. And, with PE funds sitting on $1.4 trillion of dry powder or undeployed capital, there will likely be increased carve-out activity and entity standups over the coming months and beyond.
In a divestiture, the transition from being part of a company to a standalone entity is complex and requires infrastructure and subject matter expertise across multiple business functions. While each deal is unique, focusing on five functional areas and understanding their requirements and complexities can help companies deliver returns to investors while maintaining high quality products and services for consumers.
Many aspects of the divestiture can be difficult to implement due to changes in business processes, the addition of new staff, employee morale, or bandwidth issues
Retaining talent is key in the divestiture process and timing is important. Implementing a retention and incentive strategy for high-value employees that will be carried into the new company is critical. Management should simultaneously develop a hiring budget and implement a hierarchy of must-have vs. need-to-have roles, which allows for efficient ownership and accountability for critical day-to-day responsibilities. Developing a day-one separation staffing plan will help ensure the transition is adequately resourced. This plan may include interim management and staffing.
HR should employ robust employee guidelines, including a new employee handbook. By establishing and approving a clear decision authority matrix, companies can drive effective approval workflows for purchasing and other operational decision making. It is also critical to consider employee benefits for those from the carved-out entity. As an example, for retirement benefits, management should design and execute a 401K plan and other retirement benefits, including any request for proposal (RFP) processes for new benefit vendors, and ensure required documentation and notices are completed within guidelines to properly transition and/or initiate new coverage. HR should also establish new onboarding and offboarding documentation and clearly address reporting requirements.
Management should communicate any changes in day-to-day activities to its employees. Providing a clear point of contact for employees to voice their questions and concerns is an important part of this process. Having question and answer sessions with employees or a list of frequently asked questions can help address commonly asked questions without redundancy. Communication to outside partners and customers is also critical and should begin early.
To ensure business continuity and ease for employees, management must develop a detailed and tactical plan for employee payroll processing during and after the divestiture period. To avoid disruptions in employee pay, HR should define requirements for new HRIS software that can be leveraged to manage all employee payroll, taxes, COBRA and other reporting such as W2s, and execute several rounds of parallel payroll testing.
Finance and accounting
It is crucial for the standalone entity to have robust financial reporting on day one that combines new processes and services available via a transition service agreement (TSA). Bank accounts should be separated, and a full assessment of the month-end close process should be completed to understand gaps and drive specific close risks from a policies, process, controls, and technology standpoint. A 100-day standup and integration plan must include a purpose-built chart of accounts for the new company to transact and report on a go-forward basis.
During this phase, some companies develop a plan for a phased rollout of a new or upgraded ERP and other finance systems, if necessary, to allow an effective adoption by users.
Attention should be given to current inventory accounting, valuation, and costing methodology and any associated policies followed by the financial consolidation process to reflect the new legal and management organization hierarchy. This will help to inform a new monthly close calendar. As part of the 100-day plan, an auditor RFP selection process should be initiated to install a robust audit process for the upcoming quarterly or year-end close. Updated planning and budgeting scenarios should be set up to reflect changes in growth and capital expenditure assumptions. In addition, controls must be put in place to assess liquidity position and cash management processes effectively.
Supply chain, manufacturing operations, and logistics
Given the interdependency of today’s supply chain processes, it is imperative to plan and address this area early in the process. An important first step is to evaluate supplier contract terms to ensure immediate financial and legal obligations from a transferability standpoint (e.g., performance-based termination, deferments, common law defenses, etc.). Companies should implement strategic sourcing functions using their understanding of the operational risks to negotiate new vendor pricing, discounts, and payment terms based on the target operating model.
From a manufacturing perspective, companies should review production models and the associated costing assumptions to ensure all allocations and variances are understood. Signoffs on critical design decisions that will impact the profit and loss statement and balance sheet should be expedited for approval.
Management should review the distribution and delivery model to understand structural gaps and evaluate other levers, such as supply planning and network optimization, to reduce overall logistics spend.
Sales and marketing
As a critical part of the divestiture process, a revised go-to-market strategy and differentiated value proposition should be defined for the new company’s customer base. This will require a clear articulating of what markets, channels, products, and services are key to the business for both internal and external customers. Some products may not fit in the new go-to-market approach, so it will be imperative to prioritize specific customer segments and define strategy based on them. Companies should develop and execute brand strategy and awareness through traditional marketing, social media, and other established processes. The sales and marketing group should also focus on providing a smooth customer experience throughout the transition and minimizing the impact of divestiture on customers.
It is also important to ensure that the sales organization is well positioned to enable the new go-to-market strategy, which may require organizational design changes. Roles and responsibilities for customer relationships and geographic coverage should also be clearly documented. The company should ensure that incentive plans for sales reps as well as account managers are aligned to the overall strategic goals.
It is crucial for the new company to review its existing contracts as they may have to be renegotiated. Often, legacy contracts are negotiated on volume discounts that may have to be reconsidered, and some of the customers may need to be requalified. This may require the company to renegotiate a large number of contracts in a short period of time. To mitigate this risk, the new company should start with higher-risk contracts first and consider leveraging third party services for legal and credit reporting services. Similarly, product pricing may experience downward pressure due to a more limited product portfolio and less scale in bargaining power. The new company should consider sales promotions along with evidence-based market analysis to refine its pricing practices.
Companies should also review the need for different CRM software that can track leads, opportunities, and wins effectively. Any change will require the complete migration of all relevant customer data and related attributes into the new software.
Technology and data
The technology workstream can be complex during a divestiture. IT due diligence is conducted to facilitate the creation of a 100-day roadmap in line with the TSA requirements. This roadmap consists of multiple sub-streams that cover standalone running costs of the carved-out entity, including the underlying infrastructure/data center, maintenance of existing production systems, and additional costs for implementing new systems that were not part of the transition from the parent company. A detailed plan for transition governance is important to succeed in day-one standup as well as to articulate clear accountability and operational readiness. Third-party licensing for IT systems and platforms needs to have a clear separation from the parent company. Clearly define ownership of physical IT equipment and servers. Active directory migration for the carved-out company should be complete, and the disaster recovery plan should be clearly articulated prior to day one. Access to historical financial and operational data will be key for future reporting and business analysis.
Divesting a business is complicated and time intensive. Many aspects of the divestiture can be difficult to implement due to changes in business processes, the addition of new staff, employee morale, or bandwidth issues. New hires will need time to learn the business and understand their role in the transition plan. The key to a successful carve-out is a clear separation plan, including adequate transition governance, that will serve as the foundation for a seamless transition and standup. Management must keep up the momentum throughout the transition, which will benefit all stakeholders and prevent organizational change fatigue.