Why Boards Should Maintain Divestiture Readiness 

Transaction preparation preserves value.

Your company receives an attractive, unsolicited offer for part of the business. The valuation is compelling. The buyer appears serious. Management and the board have a duty to respond. But is the company really ready?

Many boards discover too late that strong financial performance and management capabilities are not enough to maximize value in a corporate transaction. A company may perform well but still be unprepared for the scrutiny of a sale process.

That is where value can be lost. Unprepared sellers frequently fail to achieve the value they expect, not because the business lacks potential but because readiness begins long before a company decides to sell.

Companies that wait until a transaction is imminent may find themselves scrambling to explain financial performance; develop and defend earnings before interest, taxes, depreciation, and amortization (EBITDA) adjustments; identify value-accretive pro forma adjustments; address leadership questions; or resolve diligence issues. A sale process should reveal value, not expose weaknesses.

For boards, divestiture readiness should be viewed as a periodic governance discipline that encompasses strategy, financial performance, management preparedness, and operational analysis. This discipline is not simply a series of workstreams. It is a way to preserve value, strengthen options, and position the organization to act with confidence when opportunity arises.

Start with the Strategic ‘Why’

Readiness starts by asking management core questions: Why would we sell? Is the business in question core to the organization's strategy? Are we the best owner of the business? What value are we trying to achieve, and is now the right time to pursue it? The answers to these questions establish whether a company is choosing to sell from a position of strength or being pushed toward a transaction by circumstance.

The board’s understanding of the portfolio of assets and their related value should be well-defined prior to any sale negotiations. Directors should understand which assets remain strategic, which assets buyers are likely to value, and whether operational improvements could create greater value over time. Once the strategic rationale for a sale is established, the next question is whether the organization is prepared to deliver that value in a transaction.

Sustainable EBITDA Creates Buyer Confidence

Financial readiness is often where preparedness has the greatest effect on deal value. Buyers pay for confidence. They need to understand the seller’s sustainable EBITDA, cash flow, working capital, historical results, cost allocations, and the assumptions behind forecasts. Companies that can clearly demonstrate sustainable EBITDA reduce uncertainty and are better positioned to defend valuation.

This can be challenging for middle-market companies that have operated successfully without the level of financial rigor required in a transaction. Some organizations may not maintain accrual-based financial statements and have incomplete balance sheet support, unclear cost allocations, or financial records that are sufficient to run the business but not to support a sale process.

Boards should not assume that an audit alone answers every question a buyer may have. An audit and a quality of earnings analysis serve different purposes. A quality of earnings process can help identify nonrecurring items, normalize EBITDA, evaluate trends over time, and bring consistency to the presentation of financial performance.

Before going to market, boards should ask whether management can support:

• clean financial statements,
• reliable historical reporting,
• defensible EBITDA adjustments,
• quality of earnings trends, and
• credible forecasts.

These elements cannot be created overnight. They are the product of financial discipline, consistent reporting, and preparation well before buyers arrive.

Management Team Questions

Buyers do not only purchase financial performance. They also evaluate the people who will run the business going forward. A strong management team can explain performance, support forecasts, respond to diligence questions, and give buyers reassurance that the business can continue to grow after a deal closes.

In addition to asking about the above capabilities, boards should question: Is there management succession risk? Has there been recent turnover in key roles? Would a buyer need to replace leadership immediately after the close of the deal? In evaluating key leadership roles and related turnover, the board should consider necessary changes to management or other operational upgrades.

Management readiness is another area that cannot be manufactured at the last minute. If institutional knowledge rests with only a few individuals, or if the chief financial officer or other key leaders have recently left, the sale process can become more difficult. Leadership stability, clear decision rights, and the ability to communicate the business story all contribute to buyer confidence.

Other Gaps and Considerations

In addition to management team considerations, boards should weigh broader questions to pressure-test divestiture readiness, including:

1. Would a buyer understand the business quickly?
2. Has the business underinvested in capital expenditures over the last few years?
3. Are we choosing to sell, or being forced to sell?
4. Are the information systems reliable and scalable?
5. Can the business operate independently in a carve-out scenario?
6. Are there hidden diligence risks?

The answers to these questions and the related action items will help the board move beyond the idea of a transaction as a future event and toward readiness as an ongoing discipline. They also help directors proactively identify gaps that could affect value.

Preserving Options, Securing Value

Boards that maintain readiness are better positioned to evaluate a range of potential outcomes, including a full sale, minority investment, spin-off, strategic partnership, and continued ownership. When companies are prepared, they can evaluate opportunities against their strategic goals and value expectations.

The board can play an important role in ensuring the organization maintains the discipline, transparency, and preparedness needed to respond when opportunities emerge. Strategic clarity, financial rigor, management stability, and diligence readiness can help management make decisions from a position of strength rather than urgency.

Companies that maintain readiness create more options, strengthen their negotiating position, and are better equipped to act when unexpected opportunities arise.

The views expressed in this article are the author's own and do not represent the perspective of NACD.

RSM is a NACD partner, providing directors with critical and timely information, and perspectives. RSM is a financial supporter of the NACD.