Technical issues

The divestment process

Introduction

There is a long term trend for companies to seek to focus on core business activities by either selling off non-core parts of their businesses or sub-contracting services they previously carried out in-house.

Issues In The Divestment Process

• The good will or at least neutrality of the selling company.
• Gaining commitment of the employees and management in the potential buyout.
• The employees must be certain that this is a sensible option to maintain their jobs.
• Management must be convinced that this approach will lead to the creation of a strong business.
• Forming a buyout team involving all sections of management and the workforce. Note that in a sub-contacting situation not all the necessary management skills might be in the unit.
• Keeping everyone informed throughout the process.
• Due diligence investigation into the viability of the business (e.g. the market position, contractual obligations, profitability). In the case of a non-core business there may be hidden subsidies from the selling company (e.g. payroll or support services). In a sub-contract situation, there are unlikely to be any existing contracts except with the selling company.
• Producing a realistic business plan.
• Is the buyout a single bid or part of an open tender?
• Transfer of undertakings. Pensions arrangements can cause particular difficulties.
• Possible redundancies, restructuring, changes in jobs and responsibilities, bringing in new skills.
• Changing the culture of the organisation. Management must be prepared for a more participatory culture. The employees must be prepared to take on more responsibility. In a sub-contracted business, the organisation must move from being an in-house service unit to competing directly in the marketplace.
• Arranging the necessary training and support to create an independent business.
• Pulling together an appropriate team of professional advisors.

The Divestment Process

• The employees find out that their part of the business is to be sold off or sub-contracted out. This may be officially or unofficially. People are very worried about their futures.
• The idea of employee ownership is presented to management and employees in the part of the business to be sold off. Usually the earlier this is done the better.
• Do the employees want to proceed with a buyout? If not, stop now.
• Appointing professional advisors.
• Opening negotiations with the selling company.
• Producing the business plan.
• Pulling together the financial package.
• Buying the business/ signing the contract.

The Role Of The Advisors

The range of advisors you will need depends on the site and complexity of the buyout. The following are the main roles that may be required in a medium sized buyout:-

• Business advice, support and guidance.
• Training
• Advising and assisting in negotiations with the selling company.
• Drawing up the legal structure and management structure.
• Drawing up the financial package, including tax aspects.
• Legal advice, including contracts with selling company and transfers of undertakings.
• Pensions advice.
• Co-ordinating the process.