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What Are the Different Reasons for Divestiture?

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  • Written By: Geri Terzo
  • Edited By: PJP Schroeder
  • Last Modified Date: 20 September 2016
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A divestiture is essentially the release of assets through a sale or some other means. Companies could divest of a division or subsidiary, while individuals could pursue the divestiture of investments or other assets, such as property. Reasons to divest could include a need to access liquidity, or money, a desire to take profits, a change in strategy, or a negative event such as a bankruptcy.

When times are good, companies often use excess profitability to grow a business. To accomplish this, additional business lines might be added to increase the number of revenue streams coming in. Sometimes, the added business might be something completely separate from the core business, and the original management team has little experience in running this type of company.

Possibly, the new business line will not integrate successfully into the original company. Eventually, a company with multiple business lines may decide to streamline its operations as a result of faltering profits or an unsuccessful integration. In the process, there could be a divestiture of any noncore assets that are not a part of the company's primary revenue stream. The divestiture could be in the form of a sale, or a company might spin off another division into its own operating entity.

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A company may decide to divest a division simply because it is not competitive enough versus other similar businesses in the same industry. If a business does not have enough distribution in a market, or market share, it could make sense to sell this division. Management might find it more prudent to use the assets from that divestiture to invest in a business that is more aligned with the mission statement of that company.

In addition to a change in direction or strategy, a divestiture could also occur out of necessity. A divestiture could make the difference between a company or individual filing for bankruptcy or not. When a company is facing pressure on its balance sheet, and liabilities far exceed any assets or profits, divesting of some assets could raise the necessary capital to pay down any debts or invest in necessary equipment to continue operations. An individual facing bankruptcy due to excessive debt might be able to divest of assets, such as cars or real estate, in order to raise money.

Some divestitures can be done in a quick manner, but not all assets are that liquid, or can easily be exchanged for cash. As a result, some divestitures might unfold slowly over a period of time. Financial advisers and attorneys specialize in corporate and individual divestitures and can help facilitate the process and identify assets that are suitable for divestiture.

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