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SELLING A LIFE SCIENCES BUSINESS finance LIFESCIENCELEADER.COM JANUARY 2015 34 B The unfortunate truth is that most business divestitures are characterized by value destruction from inception to close. That's PwC's conclusion about divestitures according to Glenn Hunzinger, a partner at PwC Transaction Services. "Selling a business is probably the hardest thing a company can do," he says. usiness leaders underestimate the detailed planning required. Sellers often end up in front of a buyer unprepared to answer many of the buyer's questions, and the pro- cess begins to linger as the seller scram- bles to answer those questions. The longer a divestiture takes to close, the greater the risk to the seller's value proposition. Unless a company has participated in a divestiture previously, it's not uncommon to have the misconception that the effort will be quick and easy with leadership pro- viding inadequate time and resources to the process. "People have day jobs. Divestiture is just what they do after 5 p.m., and it gets second-class attention," says Munzoor Shaikh, senior manager of healthcare trans- action services at West Monroe Partners. Consultants such as Hunzinger and Shaikh say divestiture plans often lack a clear strat- egy and will present with an overly brief diligence that doesn't have an objective val- uation or a clear definition of what's being sold, or include encumbrances that may be linked with the business or asset being sold. WHY IT'S IMPORTANT TO ASK WHY Hunzinger says that leaders should con- duct regular reviews of their business and evaluate whether divisions meet the long- and medium-term visions for the company. It's at this point that divesti- ture becomes a consideration. "When opting for divestiture, the critical question to answer is the 'Why' of the strategy," says Shaikh. Answering this question affects the process. For instance, if the strategy is purely to generate cash to dedicate to the core business, the guiding principle may be speed. The guiding principle becomes risk, however, in a situation in which Company A is divesting itself of a subsidiary that hap- pens to be a supplier of critical compounds. Shaikh says Company A might need to take more time to mediate risk and ensure there is no interruption of critical supplies dur- ing and following the divestiture. CONSIDER THE TYPE OF DIVESTITURE When a company chooses divestiture, says Hunzinger, it has to answer two questions: What does the end business look like? What is the right process to achieve that end point? Consideration has to be given then to the type of divestiture. "Selling to a large corporate entity is a lot easier than selling to private equity or creating a spi- noff," says Hunzinger. Spinoffs, he says, leave no slack time for acculturation; they have to be up and competitive on day one. Creating the right culture and structure are critical. Leadership needs to look at the market to analyze the competitive environment and corporate structure that succeeds there. Using this knowledge, the mother compa- ny has to structure the spinoff to compete in that market. Hunzinger says, "Often leader- ship just mimics the structure of the parent company. There has to be a more strategic view." After all, the needs of a small biotech or device company are very different from those of a large multinational. Divesting to private equity carries many of the same considerations because equity companies usually don't have the infra- structure to support a new business. The seller may have to provide some support systems until equity can contract or hire resources to fulfill those needs. The nature of the resources, the duration they will be provided, and the expense need to be fully detailed in the contract. PREPARE THE BUSINESS TO BE SOLD BEFORE YOU OFFER IT FOR SALE "You cannot plan enough," says Hunzinger, "Up front, set a defined perimeter regarding the transaction object [what's being sold], have all the data, and complete a detailed diligence. The more you do on the front end, the faster the back end goes." F R E D O L D S Contributing Writer Salvaging Value In Divestitures By F. Olds SALVAGING VALUE IN DIVESTITURES