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Getting smaller might help your company grow

01 August, 2017

Michael Niland
US Divestitures Services Leader, PwC US

Middle market companies vary greatly, but they generally have one thing in common: They want to grow. Whether it’s a family business with steady revenue gains over many years or an early-stage tech company that’s experiencing a surge in market share, it’s important to choose a growth strategy that will help outpace competitors.

Selling off a profitable part of the business might seem contrary to that goal, but a strategic divestiture is one of seven potential paths to growth explored in a new paper from PwC. Entrepreneurs who’ve poured their time and energy into building a company may resist giving up any part of it. But the right divestiture can generate cash that sharpens focus on the core business, re-energizes workers and opens the door to opportunities that lead to faster growth.

A thorough review of data and analytics will help sort out core business opportunities from business activities that may be solid money-makers but aren’t central to strategic growth. Selling or shuttering those secondary businesses may shrink the company in the short term but provide the capital needed to invest in the more essential operations, products or services.

It’s important to recognize divestiture is not a one-off deal, but part of a strategic plan to pump money into the company’s core strengths in a way that accelerates profit growth.

Many companies might think organic growth has served them well to this point and will keep them ahead of the competition as it builds.

However, organic growth often tracks with the GDP, which has ranged from only 1 to 3 percent over the past two years. In that context, inorganic growth may be needed to fend off the challenges of new competitors, regulatory changes or disruptions in the next five to 10 years.

Consider these two cases:

  • A fashion retailer wanted to focus on its flagship brand, so it looked into divesting two other brands. The biggest challenge was to determine the real market value of those businesses, separate them from its highly integrated operations and adjust its supply chain to support a lower volume. After addressing those factors, it sold the secondary brands and made a significant investment in its flagship brand.
  • A pulp-and-paper company wanted to divest several operations, freeing capital and personnel so it could shift its focus to timber, building materials and real estate. The company has since produced some of the highest returns in its new sector.

To be sure, identifying a non-core asset for divestiture can present a challenge to some middle market companies, particularly when there’s no part of the company that is obviously losing money. Talk of a sale can also raise the anxiety of employees and owners about what the future may hold. It’s important to approach such factors carefully, and an outside advisor can help.

An independent advisor may be able to provide objective guidance on strategic alternatives available in the capital markets. It can also help to show employees and investors how getting smaller in the short term may help your company grow more quickly over time.