Divestiture process

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Divestitures process

This might be the right time to consider a divestiture – but deals take time. Get tips on making the most of your divestiture process and transaction.

If you’re looking to make a divestiture of your business, now might be the time – not just because the market is hot, but because you’ll need time to prepare for and work through the divestiture process. Deals don’t happen overnight – the complex preparation, due diligence, and negotiation can take six to seven months, depending on the need for regulatory approvals.

A major part of preparation is finding the right financial and legal representation (investment banker or financial adviser and legal team). Even if you’re not quite ready for a transaction, it’s better to vet your team before you need it – so you’re ready to hit the ground running when the time is right.

Once you have your team in place, you’re ready to walk through the rest of the divestiture process. And because you have only one chance to sell your business (or a portion of it), you want to make sure your deal is done right.

Every deal is different, but consider these general steps that can help make your divestiture process a success.

Explore the process phases below.

1 — Premarketing
2 — Marketing
3 — Auction process
4 — Negotiate and close
1 — Premarketing

Phase 1: Premarketing

Divestiture process phase 1

Month 1

Complete strengths, weaknesses, opportunities, threats (SWOT) analysis

  • Thoroughly analyze your business to find competitive advantages, and highlight them in all marketing materials.

Set up an organizational meeting that includes business owner, attorneys, and financial advisers – those who are involved in the transaction at this early stage

  • Discuss goals of the transaction.
  • Create a transaction communication plan (who should know, what they should know, and when they should be told).
  • Open lines of communication among service providers (attorneys, financial advisers, accountants) and the internal transaction team.
  • Review any structural, legal, environmental, or financial issues that might affect the value of your business.

Draft confidentiality agreements and powers of attorney

  • Work with attorneys to draft the confidentiality agreement for potential buyers.

Develop buyer lists

  • Work with the entire deal team (internal and external) to identify potential buyers.
  • The more buyers you identify, the better – you don’t want to settle on one immediately.
  • Keep your options open as long as possible. Right now, you have the advantage of time.

Months 1-2

Prepare quality of earnings report

  • Plan for and execute a sell-side quality of earnings report with your financial advisers and accountants.
  • Complete sell-side due diligence. This provides benefits throughout the transaction and can help you uncover, remedy, or mitigate any financial issues.

Draft teaser and confidential information memorandum 

  • This is an iterative process and takes a significant amount of time to draft and hone.
  • It’s your opportunity to present your company in the best light.

Perform valuation research

  • Work with financial advisers to determine reasonable expectations for valuation.

Months 1-6

Assemble and populate the virtual data room

  • Aggregate the due diligence data for potential buyers.
  • The diligence process gives you a head start on gathering data for the virtual data room.
2 — Marketing

Phase 2: Marketing

Divestiture process phase 2

Month 3

Reach out to buyers

  • Allow at least three to four weeks for your buyers to review your sales and marketing materials and ask questions.
  • Remember that buyers might have multiple deals and strict approval processes that take time to organize (such as boards of directors and investment committee approval).

Negotiate confidentiality agreements

  • These negotiations are typically handled by attorneys.

Distribute confidential information memorandum and instruction letters

  • Stick to your timeline.
  • Be specific about due dates and what information you want potential buyers to provide.

Develop management presentation

  • Educate management about the process and what to expect.
  • Plan and execute dry runs, especially for those without management presentation experience.

Start buyer due diligence

  • Agree on what data the company is willing to provide at this phase.
  • Understand shared data – from both the sellers and potential buyers – might be limited for confidentiality and regulatory reasons.
3 — Auction process

Phase 3: Auction process

Divestiture process phase 3

Month 3

Receive indications of interest, and select buyers to move forward

  • Buyers are often, but not always, selected based on price. Other factors include their plans for your business and how they're going to treat your employees.
  • In the second round, invite buyers in for a management presentation.

Month 4

Schedule management presentations

  • Presentations give the buyers an opportunity to sit down with your key management team, ask questions, and get a better understanding of the business.

Distribute revised bid instruction letter with sale purchase agreement and letter of intent

  • Deliverables at the end of the auction phase can either be a detailed letter of intent or a letter of intent with a markup of the purchase agreement your attorneys have drafted.
  • The more terms and conditions you can nail down before going into an exclusive arrangement with a buyer, the better – at this point, you have the opportunity to set your terms.

Receive revised bids

  • Advise all second-round potential buyers of the deadline for receiving revised bids. They should come in on or around the same day.

Select buyer(s) for the final round

  • At the end of the auction phase, you typically identify one buyer to move forward into the final round.
  • For a defined term (typically 60 days), you negotiate exclusively with that buyer. This exclusivity is extremely important to buyers, because they’ll start to invest dollars into various diligence paths and commit capital to the transaction.
4 — Negotiate and close

Phase 4: Negotiate and close

Divestiture process phase 4

Months 5-6

Complete final buyer due diligence

  • Due diligence is not a one- or two-day process – it takes time and is probably the most painful part of the transaction.
  • Due diligence typically lasts 45 to 60 days and involves input from many members of the key management team.
  • You’ll get data request lists from the buyer on all functional areas of your business, from financial and human resources to environmental and legal.

Negotiate drafts of the purchase agreement

  • Negotiation usually involves several iterations back and forth between the parties.
  • Have the various functional areas review the relevant sections of the purchase agreement – for example, tax accountants review tax sections and accountants review working capital clauses.

Month 6

Finalize and execute the purchase agreement

  • Make sure to thoroughly revise and review the agreement based on feedback from functional areas.

Month 7

Complete regulatory filings

  • Not every transaction requires regulatory filings (determination typically is based on size).
  • Check reporting thresholds under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR).
  • If the deal value is greater than the HSR threshold, it requires government approval, which currently takes at least 30 days.
  • Historically, it was possible to expedite deals, but since the onset of the COVID-19 pandemic, that ability has been eliminated.

Close the deal

  • Thank your internal and external teams for their help completing the deal.

If you’re considering – or in the middle of – a divestiture, our team can help you handle the details.

On paper, the divestiture process can seem straightforward – but it’s good to keep in mind that the sale process can be a roller coaster of emotions, with good and bad days. The more you can prepare for the highs and lows up front, the easier it can make the transaction process.

Learn more

Managing mergers and acquisitions or divestitures?

Keep up with transaction trends and divestiture processes in this on-demand webinar.

Our team can help

When it comes to divestitures, a lot of details need to be managed. Our highly specialized team can help you at every stage of the divestiture process, offering comprehensive planning and audit-ready accounting. Contact us today to set up your customized plan.
Kevin M. Lane
Partner, Advisory Services