Many middle-market business owners struggle to determine whether to continue pouring significant time, money and other resources into non-core business divisions or subsidiaries — that is, those that are not vital, essential or are no longer necessary to a company. For many, finding the right answer is a difficult task that often gets deprioritized while they focus almost exclusively on the immediate needs and daily operations of their businesses. Unfortunately, neglecting to address these questions often ends up hurting their businesses and diminishing their success.
How should you approach a division that is troubled, not growing, no longer fitting your core business or strategic plan, and/or consuming a disproportionate amount of time and capital? Following is some practical guidance based on my experience helping middle-market business owners evaluate the alternatives and navigate these complex issues.
First, an easy answer could be: If the non-core division is losing money and/or dragging down the rest of your business, you might shut it down. However, this quick fix is not always the best course of action. Another party might find value in the division and give you additional capital that you can redeploy for growth. Keep in mind that what is not good for you might be ideal for someone else. If the line of business has this type of potential, you might try to find a buyer capable of maximizing it.
So, how should you begin your analysis?
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▪ Start by closely evaluating the financials for the business unit you might be looking to sell or shut down. You should also examine on a pro forma basis the financial situation of the remaining business as a standalone unit, thereby enabling you to examine the financial implications of the potential divestiture and make sure it will not hurt your business financially or otherwise. For example, the division might actually be contributing to help cover a part of your overhead. In this case, a divestiture could have more serious financial implications on your overall bottom line than you had imagined.
▪ Evaluate your company’s current management and employee headcount. If you divest the division, do you need to reduce management, as well as your company’s overall headcount? How would this impact your company? Would losing these employees hurt other areas of your business?
▪ Evaluate your real-estate facilities and determine what you should do with any physical space that will be vacated after the divestiture. Let’s say the division you are looking to sell occupies 30 percent of your warehouse. Would you be better off subleasing that space, moving other core business operations into that space, or leaving it open to accommodate future expansion?
▪ You must also evaluate the potential impact of the sale on your clients or customers. Do they currently choose to do business with you because of your ability to serve as their one-stop shop and offer those products or services, even if those products or services are non-core business areas that are unprofitable or loss leaders? Could the sale potentially cause you to lose customers or diminish their satisfaction? Also, what about your competitors — do they currently provide any of those sought-after products or services? If you were to eliminate that part of your business, would you be in effect giving your competitors a greater advantage by positioning them to serve your customers and steal your market share?
Big companies continuously evaluate the return on equity, performance and viability of their non-core business divisions or subsidiaries. This helps them to ensure that these lines of business are not hurting their growth rates, overall profitability and success by forcing them to devote disproportionate amounts of time and energy to these areas. Many large companies like GE and P&G continuously evaluate their varied lines of business and remain ready to sell any non-core assets. This best practice helps make them stronger and better focused on growth and acceptable levels of profitability.
Some companies may have the in-house expertise to handle these evaluations independently, but others may need assistance from outside consultants. Whatever the case, it is important for middle-market business owners to work with qualified professionals with proven expertise helping companies similar to theirs navigate these issues. While this may require some investment in terms of time, money and other resources, it will pay off in the long run by helping ensure your business is well positioned for continued success.