Over-valuing our non-core businesses ties up precious capital in the wrong assets.
Acquisitions are a whole lot more fun than divestitures (just ask anyone who has done both). But to maximize performance, smart divestitures of non-core assets are just as important as smart acquisitions.
A universal law of business dictates that we earn outstanding profits only when we are the best in our space. Out-performing our competition demands that our core business gets all the resources it needs, including capital.
If your core businesses need more capital to get ahead or stay ahead of the competition, look first to divestitures that may be the best source of funds and the equation for identifying a prime divestiture candidate is straightforward:
Value To Buyers – Value To Me = Value of Divestiture
Despite the numbing simplicity of this equation, we often overlook divestiture opportunities. The “Value To Buyers” is easily underestimated (see “Mind of the Buyer”).
Equally common (and wasteful) is overestimating the “Value To Me.” Three forces conspire, making us cling to non-cores assets too long and starve our core business:
- High Hopes For A Better Future: We delay divestment hoping that we are on the cusp of breakthrough improvements to fetch a better price. Given the time, attention and uncertainty involved, the odds usually point to selling now.
- When Profitable Equals Strategic: At the opposite end of the spectrum, we might categorize assets as core because they are currently performing well. When its next down-cycle arrives, those assets fall from grace but now market values are at their worst.
- Favoring What Is Ours: “The Endowment Effect” is an unconscious but powerful bias that exaggerates our assessment of the things we own. Somehow, just because something is “mine” I am likely to over-estimate its value.
A key question in evaluating divestiture candidates is, “If we didn’t already own the asset, would we purchase it today at this price?”
Bottom-Line: If we don’t sell it, we’ve just bought it.
Want to be the best in the world at your core business? Nourish it with capital from smart divestitures.