December 3, 2010
Selling a Line of Business
It’s been a couple of years since Return Path decided to focus on our deliverability business by divesting and spinning out our other legacy businesses. That link tells some of the story, and the rest is that subsequently, Authentic Response divested part of the Postmaster Direct business to Q Interactive. Those three transactions, plus a number of experiences over the years on the buy side of similar transactions (Bonded Sender, Habeas, NetCreations), plus my learnings from talking to a number of other CEOs who have done similar things over the years, form the basis of this post. The Authentic Response spin-out was also partially chronicled by Inc. Magazine in this article earlier this year.
It’s an important topic — as entrepreneurs build businesses, they frequently end up creating new revenue opportunities and go off on productive tangents. Those new lines of business might or might not take off; but sometimes they can take off and still, down the road, end up being non-core to the overall mission of the company and therefore candidates for divestiture. Even if they are good businesses, the overall enterprise might benefit from the focus or cash provided by a sale. Look at the example of Occipital building the Red Laser app, then selling it to eBay to finance the rest of their business.
Here are some of the signs of a successful divestiture:
- Business is truly non-core or relies on starkly different competencies for success (e.g., one is B2B, the other is B2C)
- Business is growing rapidly and requires assistance to scale properly (either technology, or sales)
- Business has its own culture and operations and “a life of its own”
Conversely, here are some of the reasons why a divestitures of a business unit might stall or fail:
- Lack of a very compelling story as to why you’re selling the business unit
- Stand-alone financials of the unit are too hard for the buyer to determine with confidence
- Operations of the unit too tethered to the mothership
- There is some problem with the leadership of the unit (there is no stand-alone leader, the leader isn’t involved in the divestiture, the leader isn’t squarely behind the divestiture)
- Business performance weakens during the process
I have a couple points of advice to entrepreneurs in this situation. The first is to clarify for yourself up front: are you selling a true line of business, or are you selling assets? If you are selling assets, you need to clearly define what they are, and what they aren’t, and you need to make sure all legal details (contracts, IP, etc.) are buttoned up before the process starts.
If you are selling a true line of business, beware that buyers will not be interested in doing any hard work, or if they feel like they have to do hard work, the price they pay for the business will reflect that in the form of a steep, steep discount. The financials must be understandable and credible on a stand-alone basis. The business must be completely separated from the core already. The business must have its own management team, completely aligned with the decision to sell.
You also have to be extremely cognizant of the human aspects of what you’re doing. Every culture is different, and I’m not advocating one style over another, but selling or spinning out a business is very different than selling a company. There’s going to be a big difference in reactions, perceptions, hopes, and fears between the people in the core who are staying, and the people in the business unit that’s going. Having a heightened awareness of those differences and factoring them into your communications plan is critical to success, as a poorly managed effort can end up harming both sides.
In terms of valuation expectations, don’t expect to get any credit for synergies. You have to present them and sell them, and they may make the different between getting a deal done and not, but they will most likely not impact the price you get for the divestiture.
Finally, remember that buyers understand your psychology as well. They know you’re selling the business for a reason (you need to raise cash, you’re concerned about its future performance, it’s become a distraction or has the potential to suck scarce resources out of your core, etc.). They will completely understand the costs you carry, whether financial, opportunity, or mental, in continuing to own the business. And they will factor that into the price they’re willing to offer. Of course, as with all deals, the best thing you can do to maximize price is have multiple interested parties bidding on the deal!