Corporate Divestiture & Demerger Process (with Steps)
What is the corporate divestiture process?
The corporate divestiture (demerger) process is the act of selling a business asset, often an entire business unit. There are three main types of corporate divestiture or demerger.
What are the 3 kinds of divestiture?
The 3 core types of divestiture are sell-offs, spin-offs and split-ups. There are also carve-outs, which are the partial divestment of a business unit whereby the parent company sells a minority interest in the subsidiary.
Divestiture vs demerger
In a corporate M&A context, there’s little difference between divestiture and demerger. Demerger means the disposal of subsidiaries or divisions of a company, while divestiture means the sale or liquidation of a subsidiary company.
Benefits of divestiture
There are numerous potential benefits to divestiture, including:
- Raising funds to pay debt or reinvest
- Realignment with business strategy
- Increasing organizational efficiency
- Enhancing shareholder value
Demerger process
Below, the demerger process is broken down into eight steps. This process is essentially the same for both a demerger and a divestiture. It is critical however that these steps are performed with minimal delay. McKinsey research has shown that separations completed within a 12 month timeframe deliver higher total returns to shareholders than those that take longer.
How to demerge a company in 8 steps
1. Determine your goals
The first step in making any major business decision is to determine the goal of the activity. What is the objective of the divestiture? What do you (the selling party) want or need to get out of the deal? Is the goal to resolve corporate insolvency and pay off debt, or is it to refocus business strategy and grow in a different direction? The goal will inform the rest of the divestiture process.
2. Choose the type of divestment
The goal determined in step 1 will enable you to choose the most suitable type of demerger: sell-off, spin-off, split-up or carve-out.
See also: Divestiture strategy
3. Include HR
HR has a critical role to play in a successful demerger. From managing the identification and movement of employees essential to the asset being divested, to liaising between teams and facilitating the change, HR needs to be involved throughout the corporate divestiture process.
4. Prepare documentation
Divestitures involve a lot of documentation—from employee-related documents to questionnaires, surveys, contracts and financial reports. The more thorough and proactive you can be in getting your material information together, the smoother the sale should be.
5. Create Letter of Intent (LOI)
The letter of intent is created when a suitable buyer is found. This kicks off the divestiture process officially.
A well thought-out LOI can act as a springboard for an efficient deal. If key points are detailed and agreed upon now, it avoids the need to negotiate them later.
6. Buyer performs due diligence
Due diligence comes next, which is the buyer’s opportunity to scrutinize and analyze information pertaining to the asset. All the relevant documentation is shared via secure data room software and there is a Q&A process between potential buyer and seller.
With Ansarada, you can speed your way through the due diligence process using granular access privileges, print and save controls, tracking of all actions, reporting and sophisticated Q&A features for seamless collaboration.
7. Prepare Purchase Agreement
This is usually drafted in a parallel process with due diligence. The Purchase Agreement should include all details from the purchase price of the asset to closing conditions, and everything in between.
8. Close the deal
Nearly half of all deals fail during the due diligence phase. Any point of friction – such as delays getting hold of information, missing documents, or disorganized financials – can put a deal in jeopardy. Good organization and speed are of the utmost importance.
Deals done with the help of Ansarada can take significantly less time. Our platform acts as a customizable template for your corporate divestment, guiding you in the right direction so you can execute the deal quickly and securely, and realize the most value.