Whether you’re a CEO exiting your business gracefully or hopelessly spiraling into bankruptcy, every business will encounter divestiture at some point in its lifespan. It’s one of the few inevitabilities for all businesses.
But what does this jargon-sounding term mean, and how does it relate to losing your assets?
This post will teach you all of that, along with how to plan for divestiture in such a way that losing business assets will benefit your company in a multitude of ways. You just need to know how to divest in a controlled and predictable manner.
- What is divestiture?
- What is divestiture in SaaS?
- Pros and cons of divestiture
- How to divest effectively
Let’s get started.
What is divestiture?
Divestiture is when a business gets rid of some or all of its assets. These assets are “divested” through sale, exchange, closure, or bankruptcy.
If that sounds deceptively simple to you, that’s because it is. The premise of a business getting rid of some of its assets isn’t limited to a particular situation - the very act of losing them is what divestiture is. This leaves a massive amount of variation in the circumstances, intentions, and impact that the divestiture has.
For example, let’s say that you own an online store, and decided to open a new venture via having a brick-and-mortar store a year ago. This new store, extra stock, employees, and so on have seen costs skyrocket while bringing very little return. Maybe your market demand predictions were off, perhaps a competitor swooped in shortly before you opened, or you could have simply chosen a bad location.
The only realistic solution to your problem is to sell or close the physical location, which is classed as divestiture.
However, choosing to close an unprofitable venture is divestiture just as much as being forced to sell off your assets due to bankruptcy. Again, the reasoning behind why you’re getting rid of assets isn’t important - the act of getting rid of them is what classes as divestiture.
What is divestiture in SaaS?
In SaaS divestiture is still the act of getting rid of assets, be it through sale, closure, or otherwise. However, the nature of those assets will differ from traditional businesses due to the kinds of assets that SaaS companies tend to have.
SaaS businesses, in general, tend to have more intangible assets than tangible ones. The nature of their technology and service offering means that a traditional office setup and physical assets are much less necessary than in, say, retail. As such, the assets that you have the opportunity to divest will be more intangible in nature, and will require a different approach to selling, closing, or generally getting rid of.
For example, many SaaS companies operate on a fully (or partially) remote basis, meaning that they don’t have a central office (or that they have a much smaller office than they’d need for their full workforce). Consequently, as a SaaS business owner you’d have less opportunity to divest property assets.
It’s not all doom and gloom though, as intangible assets still hold a lot of value.
Whether it’s the value of your accounts receivable, the patents and copyrights you own, the program you run, or even your brand as a whole, you’ll still have a lot in the way of assets that are divestible.
Remember that the method of divestiture and the reason for it don’t matter here - for you to have divested assets you could just as easily have sold the business as allowed an employee to keep their key for Adobe Photoshop.
The key to divestiture in a SaaS setting is to know exactly what you’re doing, why you’re doing it, and whether it’s going to achieve what you want it to.
Do you need to cut costs or pay back a loan? In that case, it’s best to look at your assets for those which create the least value for your business but have a high cost or monetary value and close them down or sell them off. This could be anything from closing a failing portion of your business to selling off some of the tech that’s listed under the company.
Maybe you expanded too quickly and realized that you need to downsize again. For this you’ll need to evaluate your expansions (from new offices and departments to new products and services) and sell or close the ones which are predicted to provide the least value. Preferably these should also have a high running cost or resale value to capitalize on the divestiture as much as possible.
Going bankrupt? It’s time to sell the lot!
The final element of divestiture which is particularly relevant to SaaS is that of your business’ focus.
Divestiture is a fantastic way for any company to refocus its efforts on what’s most important for its business and brand. In SaaS this is particularly relevant with the prominence of feature creep, acquiring or creating adjacent products and services, and so on.
In other words, if your business starts to flounder and has lost its sense of direction (eg, growth is stagnating and your efforts are spread over a wealth of different ventures), it might be time to divest some of your assets and refocus on your company’s core offering.
You could even set up a new company for the assets that no longer align with the original company - divestiture is when a business loses an asset, but there’s nothing saying that the owner of the original business can’t also own the business the asset is acquired by.
Pros and cons of divestiture
Let’s run through the pros and cons of divestiture quickly. For the positives it can:
- Provide a cash injection
- Cut costs
- Refocus your business
- Increase business value
The primary monetary benefits of divestiture are obvious; selling an asset will bring you a cash injection which can then be reinvested into the business to improve performance. The asset that you get rid of will also likely have operating costs that you lose at the same time, meaning that you’re saving money in the long term too.
We’ve already touched on how divesting assets is core to refocusing your business, but to reiterate it’s key to cutting through the clutter that a business acquires over time in terms of items and wider ventures. Think of it as spring cleaning - you can get rid of anything that doesn’t fit your core brand, thus making your offering all the stronger for it.
Speaking of which, it’s a fairly common tactic to split businesses which grow to a point where they lose focus on their original goals in order to allow them to separately flourish and focus on their own goals. This “shrinking to grow” tactic involves divesting the assets and teams to the new company so that your teams can focus on their core offerings separately without having to worry about affecting the other’s performance.
Perhaps most importantly, when you divest assets your management figures no longer have to consider them in their plans and actions. Whether you’re transferring them to a new company or just trimming the fat, this means that your leadership can once again drill down on making the company as successful as possible.
However, divestiture can:
- Signal problems ahead for stakeholders and lenders
- Be difficult to predict
- Limit your growth
- Take a long time to carry out
When you divest assets (or an entire business) you send a message to your stakeholders and potential lenders alike. Whether it’s true or not, that message is that they need to be wary, because the people in charge of the business have reduced their investment in it. They will see you shedding some of your assets and wonder whether the business is set to run into problems or even failure down the line.
As a result, depending on the size of your divestiture, you may find it difficult to raise additional funding for your company, which is especially problematic in a SaaS setting due to the early reliance on investments before the business starts to turn a profit.
To avoid this you need to prove to your stakeholders and lenders that the business will be healthier and more successful as a result of the divested assets.
Unfortunately, this can be extremely hard to predict.
It’s next to impossible to know for certain what your market will look like in a few years’ time. You can’t realistically tell in most cases whether an asset that you just dropped would have reaped huge dividends further down the line. This is why it’s vital to be cautious with divestment, and to do so only when the benefits of losing an asset are worth the potential lost positives of keeping it.
When you get rid of an asset you’re also naturally reducing your company’s potential growth. While in practice your growth could increase due to focusing your resources more carefully, the unpredictability of future success can leave you on the sidelines if something unexpected happens to the assets you’ve ditched.
Finally, divestiture can take a long time and a lot of effort to carry out. The time and effort will often scale with the number of assets you divest, how large they are, how complex they are, and how closely they’re linked to your core business model.
For example, selling off some spare technology can be done relatively quickly, as you can simply list your excess items for sale. However, splitting your business in two with separate goals and resources can take upwards of a few years of planning to achieve. You’ll have to untangle all of your finances, split teams, assess all of your existing assets for their suitability to each business, and so on. It’s a massive undertaking that often isn’t the best solution for “we need to majorly cut costs to stay afloat”.
How to divest effectively
There are a couple of ways to divest business assets, the effectiveness of which depends largely on the reasoning behind why you’re doing it. For example, you could sell off assets that are costing your business too much, close ventures or offices that aren’t bringing in enough value, or sell the entire business as an exit strategy or due to bankruptcy.
However, the vast majority of divestiture situations will have the following method in common:
- Assess your assets
- Choose one (or more) to divest
- Identify a buyer (if applicable)
- Divest the asset(s)
- Monitor and manage the transition
Perhaps the most important stage in all of this is the first one - assessing your assets to see which would be best to divest for your needs. This will depend on the complexity and size of the assets you have (how much they are worth, how central they are to operations, etc) and the reason why you’re considering divestiture (reducing costs, refocusing your business, etc).
The key here is knowing exactly what the impact of divesting your assets will be before it happens. You don’t want to get to the stage of selling off an asset only to realize that it’s core to your business and that you need to replace it immediately, or that the lack of it inhibits one of your team’s ability to perform their core duties effectively.
Once you’ve got a solid sense of the assets available you can choose which one(s) to divest. This decision should be made based on their operating costs, the value they bring to your business, and how difficult they would be to untangle from your operations should you decide to get rid of them.
Next, you need to find a buyer for the asset(s), or to take stock of what closing it down will entail. This can be difficult depending on the asset you’re divesting, as you should always be looking to sell an asset for at least as much as the opportunity cost of not selling it.
Once you know how you’re going to divest the asset you can move forward with doing so (whether that’s via selling or closing it down). The only thing left to do is to monitor the transition in your own company and make sure that the divestment goes smoothly. This means taking stock of everything that the assets were linked to, whether and how performance drops, and so on.
For example, let’s say that you’re a SaaS company with numerous AWS accounts to enable your day-to-day operations and future architecture investments.
You need to cut your AWS costs, so you assess all of your assets to see which are costing you the most and being used the least. This is particularly relevant to reserved instances, as these have a definitive market value via the RI marketplace.
However, AWS is a niche which requires a wealth of experience in order to understand and be able to predict the impact of any asset divestiture. Even though you have the native option of Cost and Usage Reports (CURs), these are a nightmare of figures with very little context, especially to an inexperienced eye.
So, this is where you might want to call on a third party such as Aimably with our AWS Cost Reduction Assessment. We will tell you what your costs are, break down what they mean, highlight areas where your spending is higher than the value you’re getting back, and even make tailored suggestions to show you how to optimize your accounts, be it through expansion or divestment.
Want to learn more? Click here to get started with Aimably.