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Salt Lake City Bookkeeping Blog

How to Use Divestment to Downsize Business Interests or Assets

Posted by Leanne Armstrong on Oct 31, 2018 9:00:00 AM

How to Use Divestment to Downsize Business Interests or AssetsThe process of reducing business assets or selling off all or part of your company is known as divestment or divestiture. Business divestment effectively downsizes or eliminates your interest in your company and the property it owns.

Why Divest?

In most cases, divestment is accomplished by closing down or disposing of:

  • company product or service lines,
  • equipment or property,
  • entire departments or business locations

There are many reasons why you might choose to pursue divestment as a business owner. Let’s take a look at the most common of these.

Resolving Cash Flow Issues

Disposing of assets happens frequently in business. In too many cases however, the sale of equipment, inventory – even product licensing agreements – is an attempt to offset poor cash flow management. Keep a consistent eye on your company’s cash position to avoid selling off assets for all the wrong reasons.

Eliminating Unproductive Investments

If a product or service isn’t living up to its financial potential, selling or closing it down may be your best course of action. Some business owners are reluctant to give up on less-than-profitable ideas however, because they’ve invested so much time, money, and energy into making them work. Understand that pulling the plug on a fruitless pursuit - and accepting the loss that often goes with it – inevitably frees up valuable resources that can be invested more profitably elsewhere.

Offsetting Unruly Expansion

Growing too quickly can mean trouble for even the most promising venture. According to Entrepreneur, roughly two-thirds of the fastest-growing startups end up failing. Shutting down an under-performing branch or location – or selling off a subsidiary misfit – is a common divestment solution for unplanned or overzealous scaling.

Responding to Bankruptcy

Bankruptcy can force companies to liquidate some or all of their assets and close their doors permanently. While numbers have decreased significantly in recent years, American Bankruptcy Institute statistics still indicate that more than 23,000 businesses filed for bankruptcy in 2017.

Divestment as An Exit Strategy

Many business owners use planned divestment as a framework for selling or shutting down their commercial holdings when it’s time to retire or otherwise move on.

In the end, your decision to divest may stem from multiple goals. But whatever your reasons for downsizing, you should try to part with business interests and assets from a position of strength, rather than as a reaction to poor financial planning.

Basic Divestment Pointers

Once you’ve decided that some form of business divestment is in order, it goes without saying that you’ll want to unload bits and pieces of your company in the way that will benefit you most. Unfortunately, a certain amount of compromise is sometimes required when it comes to selling off assets.

You could choose to part with only your best-performing products, services, property, or equipment in exchange for a decent price. Or you could approach divestment as a way to dispose of less than desirable assets for as much as you can get.

In either case, it’s important to recognize that selling off something your company owns is often an irreversible process. Make sure you’re not trying to apply a permanent solution to a temporary problem like a cash flow crunch.

Here are a few more points to consider before planning a business divestment:

What to Divest

Remember that current assets like inventory and accounts receivable are usually more quickly and easily converted to cash than long-term assets like equipment and property.

When to Divest

Both products and services have a measurable and manageable life cycle. The classic product life cycle, for example, includes development, introduction, growth, maturity, and decline. As a result, the best time to sell or discontinue a product in many cases is after it’s reached maturity and begun its decline.

How to Divest

Financial ratios that measure profitability can be a great help in determining how well your business and its individual parts are performing. Some of these ratios assess profit margins, while others measure your return on asset investments. 

It’s important to be objective in your evaluation of specific business components, and to back up your assessments with figures and facts. You may discover that the asset, service, or branch you’re considering doing away with is nearing its financial break-even point – and that could be reason enough to rethink your decision.

Ideally, the best way to approach any business divestment is with a plan and the help of an accounting professional. Engaging in periodic discussions about your company’s financial progress and potential will help you allocate resources more effectively, and cut or prevent losses in unproductive areas.

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Topics: Business Divestment, Exit Planning, Growth Coach, Financial Forecasting, Cash Flow Management