By Tanuja A Akkannavar
To achieve market share and sales goals, businesses often acquire properties, develop new business lines, or buy companies or portions of companies as they expand. Development can also mean changes in a company's markets and operating environments, which can lead to strategy shifts. When a company's strategy shifts, it can decide to sell properties, business lines, or subsidiaries that are no longer relevant or underperforming in other areas.
Divestitures allow businesses to retain their strategic emphasis. Divestiture of low-profit assets frees up internal assets that can be used to boost the company's other companies. It also offers funds for the acquisition or enhancement of properties that can raise revenues. The selling of a company asset is referred to as divestiture by a small-business owner. A production plant, unsold inventory, idle machinery, or even an entire business unit or division of the organization may be considered an asset.
There are several advantages to selling the business, as long as it is not due to bankruptcy or other unexpected circumstances. Since each company's needs are different, the advantages of divestiture will most certainly be different as well. In certain situations, divestiture may help a company improve its cash flow. In other instances, it will assist companies in streamlining and retooling their operations in order to become leaner and more profitable. Following are some of the benefits a company can gain by Divestiture:
1. Reduced Debt –
Reduces the amount of debt on the company's balance sheet, it is a financial target that can be accomplished by divestiture. The cash earned from the selling of the asset is used to pay off a portion of the company's debt, such as bank credit lines. As a result, more credit is available to the company, enabling it to take advantage of opportunities such as buying raw materials at unusually low prices.
2. Increased Cash Reserves –
The divestiture will support the company's cash reserves, making it a safer choice than a small business loan for you. Loans are a viable choice to explore, but they would almost certainly require good credit and a long track record of business performance. Not every business has those items on hand, which can make it difficult to get approved for any but the most costly loans with short repayment periods and high-interest rates.
3. Avoiding the Defeated Cost Errors –
By divesting from areas of your company that have no real chance of succeeding, you will avoid falling victim to unwanted cost errors. This can take the form of a failed business branch, an unprofitable product line, or other projects that aren't working out as expected. The sooner you divest, the sooner you will cut your losses in this situation.
4. Strategic Sale –
A rational investment happens when a business purchases an asset that aligns with its strategic goals. The acquiring business will boost sales revenue and maintain a long-term customer by buying excess capacity from another company. The strategic value of the property to the acquirer company may mean that its mangers seem to be willing to pay a higher price for the entity, which benefit the organization attempting to sell it.
5. Streamlined Operations –
Enterprises are typically focused on expanding their companies. Many people want to evolve as fast as possible. However, this does not always work out as expected, and you can find yourself in a situation where you need to reduce your operations and reconsider your business strategy. Instead of incurring sunk costs in holding poorly performing parts of a company that operates in the expectation that they can finally turn around, divestiture helps you to cut the expenses on overpaid aspects of the business.