Both the extent of non-core and underperforming operations and the pressure to relinquish them have grown in the wake of the COVID-19 pandemic. So too have the options for sale, as private equity buyers and specialist consolidators look to deploy their high levels of available funds.
Getting exit right means more cash to reinvest. The big risk is creating an exit process that consumes excess time and resources, leaving precious value on the table.
How then can you make the most of an exit’s potential while avoiding the pitfalls? In this report, we look at what’s driving exit strategies, the options available, the dynamics within the market and how our specialist team can help you to maximise value.
The pandemic has increased pressure on business leaders to exit non-core and under-performing operations. This is both to shore-up vulnerable finances in the short term and to set their businesses up for longer term shifts accelerated by the pandemic, such as digitisation or the move to Net Zero.
Do you have a non-core asset you are assessing your options for?
Do you have an underperforming division taking up excessive management time and/or draining financial resources?
Are you experiencing a significant shift in customer demand, route to market or compliance requirements, which calls for a strategic reassessment of certain operations?
Are you looking to carve out or de-merge operations as part of a strategic restructuring?
Do you want to sell an operation and need support to maximise exit value?
Do you need to winddown or close an operation?
Can a business with no value be exited using an insolvency process?
Do you require an exit plan which aligns financial, operational, strategic and organisational goals?
The 80:20 rule holds that most of the value generated by you and your business comes from 20% of the effort. The big questions are how to refocus your time on this golden 20% and what to do about all the distractions and low value activities that are keeping you from the prize.
Almost invariably, a large proportion of your time is pulled in the wrong direction by underperforming products, subsidiaries or locations. Making the decision to exit can be hard, especially if they have been mainstays of your business in the past. But times change.
If done at the right time and in the right way, exiting noncore businesses can free up cash, resources and time to ultimately drive growth.
Following acquisitions, strategic reviews or indeed in the normal course of business, you are likely to find that certain products, subsidiaries, locations or even territories are absorbing valuable resources, but not delivering sufficient returns.
The upheaval of lockdown has brought these considerations to the fore by heightening the pressure on resources. Revenues in many sectors dipped or ground to a halt altogether. Yet even with job retention grants and support, expenses kept coming or were deferred temporarily. As government support measures come to an end and demands for deferred rents come up against the costs of replenishing inventories, the need to focus time and finances has never been greater. Some areas of your business are likely to be taking too much of both, with little reward to show for them.
The upheaval of the pandemic has also redefined what is coreand non-core. The retail sector is a clear case in point. Digital sales and home delivery were already gaining ground on physical ‘bricks and mortar’ outlets before the pandemic. But with non-essential shops closed, the move by customers from bricks to clicks has accelerated.
Many other industries are following suit to a greater or lesser extent, from the upsurge in takeaway and delivery to the further decline of branch banking and rise of mobile alternatives. How do you concentrate resources on the growth areas? What do you do with assets and operations that are surplus to requirements?
Other shifts accelerated by the pandemic include the focus on sustainability, social impact and other environmental, social and governance (ESG) issues. With investment, some products and production facilities can be adapted to the demands of Net Zero. But for others, the cost could be too great or difficult to justify if customer expectations are changing. You may also want to refocus resources on faster growing green markets or bring jobs onshore to help support local economic priorities.
Again, how do you free up funds for ESG investment? What do you do with operations that fail the ESG test or are no longer fit for your strategic purposes?
Geo-political and jurisdictional factors often drive a decision to exit where operating in a market no longer makes strategic sense. In some cases, an orderly winddown may be preferable to selling to a competitor/willing buyer and handing over the market to them.
Changes in trading arrangements, such as Brexit, have added further impetus for strategic reviews and can result in pressure for exit and divestment. Extra charges, paperwork and taxes may make operations in certain locations less viable.
Further examples include the political tensions between the US and China, which are spurring many businesses to re-evaluate their supply chains. These events see strategic decisions being taken to change footprints in global organisations.
The good news is that what may no longer be core for your business could well be a target for others. M&A activity is currently at record levels in many countries as companies look to build up competitive scale and reach into new markets. In addition to corporate buyers, private equity funds have considerable dry powder that they are keen to put to work. The buyers also include specialist run off consolidators in areas ranging from retail to discontinued insurance portfolios.
So, far from being an issue to deal with when you have more time, an exit strategy should be at the centre of your plans right now. In the words of the legendary Jack Welch, former Chairman and CEO of General Electric: “If you cannot win, it is best to find a way out ... Focus on your core strengths, and get rid of weak businesses that slow you down.”
Our team works alongside you to evaluate options and develop the most appropriate exit strategy.
1. Urgency - Being proactive when faced with non-core or underperforming operations is essential. When management don’t have an exit strategy or are too slow to act, a business can quickly become distressed.
2. Assess the options - There are a number of options for dealing with non-core or underperforming operations depending on the circumstances and the time available to address the situation. These include turnaround, divestment or controlled winddown closure.
3. Be prepared - Preparation should include your exit strategy to maximise value, as well as to minimise cost and time burden on the business. Working with advisors experienced in this process can give you an important edge.
Where improving the business is a possibility, we introduce turnaround professionals to help you to assess the immediate issues, as well as your ambitions and objectives for the future. Using dedicated resources we help you build, stress test and implement an appropriate strategy to improve sustainable profits.
Should a disposal be the best strategy, we position the business to maximise value, effectively targeting buyers and managing the sale process. We work to reduce any disruption on core businesses, which could be intertwined with the non-core unit for sale. We manage the whole process, saving time, cost and minimising reputational risk.
If the best option is to close the business, we deliver a comprehensive and cost-efficient closure programme. We would support your business on all matters from tax planning, pensions advice, minimising directors’ and shareholders’ liabilities to providing practical support for dealing with suppliers, customers and employees.
Ultimately, our goal is to realise maximum value from your business and to free up precious management time.
Our approach in supporting you to assess, protect and restore value in your business starts with helping you identify and assess your strategic options, through to developing a robust and realistic plan to exit non-core operations or restructure/turnaround under-performing operations as part of a focused growth strategy.
Grant Thornton member firm advisers draw on deep expertise across many different areas, customised to your specific needs. We can support with all aspects of developing your plan, download 'Maximising exit value [pdf]' for further details and who to contact to help make the most of divestment, winddown or turnaround.
