Selling Part of the Company: A Way to Weather Today’s Financial Storm

The economic downturn has cause companies from all sectors to make difficult decisions necessary to weather the impact making the advantages of the partial divestiture even more compelling. Large and small companies are considering selling part of the company as a way to raise cash in case the banks decide to limit or not renew the credit lines and the customers slow down on paying their invoices.

Companies are selling divisions or subsidiaries that no longer fit their core operations. The benefits to the seller can be dramatic: making cash available to pay down debt, getting rid of an unprofitable business unit, or in the case of a small closely-held company, offering the opportunity for the owner to slow down, but not get out of business entirely.

For the owners of the smaller company, the decision to sell, or not to sell, part of the company is often driven by emotion, rather than economic prudence. Smaller companies are owned by entrepreneurs who make all the decisions for their company and tend to measure their success in terms of gross volume. The entrepreneur is infatuated with bigness. Making the company smaller is usually not an option. Instead of selling unprofitable divisions, the owner keeps trying to fix them by infusing borrowed funds. This is expensive and has to be paid back. Such a rigid fixation on size often leads to financial problems for the entire company. But there have been some owners of closely-held companies that realized the importance of selling off part of the company when the timing was right. They proved that the advantages found in the partial divestiture were not a secret lost in the large conglomerates. They were able to recognize the value in selling off part of the company — whether it was a need to come up with quick cash, divest an unprofitable division, or just sell a majority of the company and keep the less stressful part to supplement income during retirement.

In preparing for this article, we reviewed the 150 plus security guard industry transactions our firm has managed. We have represented sellers of companies with annual sales as small as $1 million, as well as multi-billion dollar public conglomerates in selling off security guard divisions. Many of our seller/clients had multiple offices or divisions, which allowed for selling off part of the company without taking value away from the business that remained.

We were reminded from our review that over 100 of these 150 plus transactions had something to do with a partial divestiture; even though some of our seller/clients were small.  There is no company too large and few companies are too small to take advantage of a partial divestiture. The only requirement is that the company has “divisible units.” The partial divestiture provides needed capital in the form of equity, as opposed to loans that are expensive and have to be paid back…and helps the company reach their financial goals — first by downsizing through getting rid of unwanted separate units — then taking the proceeds and redirecting them into more profitable areas.

With today’s economic challenges, having sufficient cash on hand certainly helps the company weather the economic storm. After downsizing through selling off part of the company, the resulting company is usually built back to one larger than its original size — more focused and more profitable.

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