Four Considerations Before a Divestiture

In the dynamic landscape of the IT industry, companies may find themselves engaged in divesting certain assets under their purview. When it comes time for a divestiture, it’s important to set your company up for success. ERP Suites has helped several companies achieve successful divestitures over the years.

Read on to find out our top four things to consider before a divestiture.

What is a Divestiture

A divestiture is the strategic move to sell off a business division or asset. This can be a result of various factors, including strategic realignment, financial restructuring, or a shift in business focus. Whatever the reason for a divestiture, real care needs to be dedicated to ensuring the overlapping time spent together between the buyer and the seller is utilized as efficiently as possible.

The unique relationship between the two parties must also be deftly handled. While business interests necessitate cordiality, the pressures of time can lead to new strains in the process. Having an excellent partner like ERP Suites to shepherd your company through the steps of a divestiture puts you at a distinct advantage in achieving success, as they can guide you through the four most important considerations of a divestiture.

Four Considerations of a Divestiture

ERP Suites now has the successful brokerage of several divestitures under its proverbial belt. With all that experience comes valuable insights into the best ways to approach a potential divestiture. Of all the priorities to juggle during the divestiture process, the four most essential considerations, as ERP Suites sees it, are as follows: Transition service agreements, system integration/IT transfer/data migration, security concerns, and financial reporting and analysis.

Transition Service Agreements (TSAs)

When two companies engage in a divestiture, there is inevitably an overlap of time when the company divesting of an asset is obligated to assist the buyer for a specified period. Typically, this ranges from six to 12 months. The agreement that the seller will assist the buyer for the defined length of time is known as a transition service agreement, or a TSA.

Understandably, there is a real sense of urgency to conclude the TSA as swiftly as possible, thus allowing the seller to move on and the buyer to minimize costs. Akin to a business divorce, the negotiations of a TSA’s terms can be complex. That’s why it’s best to have a dedicated expert like ERP Suites to keep everything running smoothly during the TSA period – and if possible, they can help abbreviate the TSA’s length, relieving both parties of the overlapping duties.

System Integration, IT Transfer and Data Migration

Just as you would check under the hood when purchasing a new car, it is essential to understand the systems in place and their associated costs of the divested asset. The selling company must provide a comprehensive breakdown of technology, covering everything from email systems to ERP platforms, so the buyer is fully aware of what they’re undertaking.

Challenges arise when the divested systems may not seamlessly integrate with the new environment, causing operational disruptions. It’s crucial to be aware of the system’s scale and scope, to see how it fits into your existing environment. Sometimes, the divested systems may also not be well maintained, adding another dimension of complexity and additional need for delicacy to the whole endeavor.

You must assess each existing system and have a plan for how to run it moving forward. Evaluate how the seller will perform data segregation – remove extraneous information without wiping pertinent data or necessary licenses – and how the buyer will perform data migration – segregate their data out.

While one of the most fundamental elements of operation, email can often be overlooked in the migration strategy. If the two companies don’t integrate their data properly upon handoff, emails can be lost in the process. It’s best practice to establish the time when the old email will still be viable, allowing for harvesting of any relevant emails before any email cutover occurs.

Security and Licensing Concerns

Closely tied to data integrity – layered on top, in fact – is the issue of addressing security factors. It’s imperative to be sure that not only is the data properly segregated, but that it retains its integrity and that only authorized individuals have access. The seller wants to be sure the buyer can’t access the data, while simultaneously running their company until they can totally divest the sold entity.

Having up-to-date licensing also contributes to a healthy security environment. The purchaser needs to consider how applications are licensed, how they do and will run, and, circling back to data integrity, how the data therein is segregated out from said applications.

Financial Reporting and Analysis

When a buyer acquires a divested company, a top priority is to get a grasp on financials as soon as possible, so they can start managing the business their way, move to profitability, and assess performance. Anytime a private equity buyer purchases a new company, they will want the financial data to assess how their newly acquired asset is performing. (For organizations continuing to utilize JDE, decreasing the chances of fraud of any kind is essential.)

Existing packages in the financial modules may have been configured for the selling company, and therefore not always fit the buying company. Often, companies don’t choose to bring along the consolidation package or reporting systems. These tools generate high-level financials, and their absence necessitates a short-term solution that makes those reports available, even at a more basic level. By putting together what is essentially a default financial reporting package specifically for the duration of a divestiture timeline, the new team can get a handle on their numbers and then scale up according to their own best practices moving forward.

Defining Success

Ultimately, at the end of a divestiture, both sides want to feel satisfied.

For the buyer, success can be measured by the speediness with which the divestiture process occurred. Were they able to successfully end the terms of their TSA with the seller in a harmonious but timely fashion? Are they confident that once the TSA is completed, contact will be limited and as minimal as possible – ideally, nonexistent? It’s necessary to brick up the doorway, as it were – that is, physical and digital separation.

For the seller, the situation is more difficult. At the end of the day, terms have largely been dictated to them, and they must also figure out how to operate within the strictures of the TSA. Are they able to release themselves from said TSA as quickly as possible, while ensuring their own continued business has an independent infrastructure that allows them to move forward? Once they are finally separated from their divested asset, they can transition from the chaos state to running their transformed business.

Moving Forward

At the end of the day, companies undertaking a divestiture must ultimately keep top of mind the stance of being proactive rather than reactive. By partnering with a trusted consultant like ERP Suites for your divestiture, you’re ensuring that your ducks are all in a proverbial row. By engaging a consultant, you’re already taking the first step towards proactivity.

We’d be happy to speak about it with you – you can reach us here.