Divide and prosper

How often have you heard that the sum of the parts is often worth more than the whole? The same can be true for SMEs. By TOM McKASKILL.

By Tom McKaskill

Many business owners only think of selling the whole business without considering whether it could be sold off in parts. In fact, a business’s total sale proceeds may be significantly more if it is sold in stages.

Selling your business off in parts has the potential to not only make more money for shareholders, it can be a very useful way of restructuring or refocusing the business. 

A lot of businesses grow in an unstructured manner. Investments are often made over time to suit the personal interests of the owners or to solve temporary problems. Often those investments end up with a life of their own and develop into significant parts of the business.

Many family businesses grow this way and end up spread across a range of activities that are sometimes only loosely integrated. In fact, when it comes to deciding what makes the most sense – or the most money – there are often parts of the business that should be sold off.

One harvesting strategy is to prepare one part of the business for sale at a time. Where there are different parts of the business operating in different markets and with different products or services, this should be relatively easy.

The objective is to repackage the business unit as a separate stand-alone business and then prepare it for new ownership. This is often easier to resource – and certainly easier to manage – if there are very different buyers for the different activities.

Proceeds from the sale can either be channelled back into the core business or given to the shareholders. Alternatively, the business can be restructured to allow some shareholders to cash out, thus providing a way of concentrating the shareholding or providing flexibility to bring in new shareholders.

One strategy that is becoming more popular is to bring in a private equity firm to help with the sale process. This could be as simple as selling a share to the private equity firm in order to take part of the wealth out of the business, or it could be to engage the private equity firm to help fund and execute a breakup and sale process.

The private equity firm can bring additional resources in both management and funds to the table to assist with the strategy. It may also initiate and fund a roll-up strategy where some parts of the business can be combined with other firms to create a more attractive acquisition target.

Often when I investigate a firm to prepare a sale strategy, I uncover a variety of underlying assets and capabilities that will appeal to two or more very different buyers. In order to optimise the overall sale price, I will recommend that the firm be split up, with each part being specifically targeted for a selected set of potential buyers.

This process takes time and money, and thus a phased approach is often the most sensible strategy. Of course, it is also true that a complex business is often hard to sell because it may not have an obvious buyer.

I have also seen situations where one part of the business is worth more by itself than the value that was originally assigned to the whole firm. The sum of the parts is often worth more than the whole.