Transform to transact: A faster and sharper way to maximise sale value

According to PwC’s latest CEO survey, 22% of UK CEOs believe their current business will not be economically viable in the next 10 years, and yet given market conditions and balance sheet strength struggle to see how to fund the transformation necessary to pivot their business model.

This calls for an acute focus on a capability-driven strategy - namely which functions are truly differentiating in the market - and a ruthless prioritisation of these capabilities. As a consequence of this approach, divestment of non-core operations can release the funds needed for business modernisation.

But with potential buyers (whether commercial or private equity) likely to apply a valuation haircut for uncertainty and the cost of turnaround of these divestments, the big question is how to get operations ready for sale at the best possible price: a focused uplift could make all the difference in maximising the investment potential for the core business model pivot.

We call this ‘transform to transact’. How does it work?

Corporates tend to think of divestment as a way to realise value from a discrete part of their business. These kinds of deals will continue.

But as cloud transformation and the shift to net zero accelerate, we’re seeing a rethink of what is core and non-core. Moving quickly to distinguish the aspects of the business model that are central to the organisation’s future, and then divesting ‘non-core’ operations can free up the funds for transformation that may be hard to secure as borrowing costs rise and the economic downturn squeezes balance sheets.

The downturn is depressing valuations and raising the bar for deal approval. The central challenge of a seller is how to make the divested asset sufficiently attractive that buyers will be prepared to pay a premium price that will enable you to fund the necessary transformation in your core.

What if you considered transforming your non-core operations to better position your transaction?

Transform to transact

This is where transforming to transact can prove so valuable. This isn’t the full transformation that you would apply to a core operation primed for growth. Neither is it what a CIO or CTO would deem to be enterprise modernisation. For example, they might want to upgrade to a new ERP system, but the buyer may already have its own so this will add no value - the ruthless prioritisation of efficiency and growth initiatives in highly time-constrained programmes are fundamentally different from any wider systems integration or growth-driven programmes you may normally undertake.

Rather, transform to transact focuses on the targeted steps (that are also foundational for the buyer) to optimise value in and enhance perceptions of the divested operation’s future potential.

Boost short-term returns

Maximise revenues through steps such as seeking out new distribution outlets, pricing or promotion optimisation, product or service portfolio trimming etc. Boost cash flows by looking across existing programmes for interdependency and holistic contribution rather than whether each is NPV positive, and releasing tied-up funds including an acute focus on working capital initiatives.

Create freestanding financials

Create a standalone (or shadow) P&L and balance sheet so potential buyers can gain a real picture of the revenues and costs, and position the business with operating models that are not constrained by the wider business (and therefore also accounts for tax considerations and any transfer pricing) to make it easy for the buyer to minimise carve out costs.

Highlight the value potential

Identify the growth potential for a buyer and whether the sale lends itself to a trade/commercial buyer vs private equity as the short-term optimisation approach may vary according to the most likely buyer. This includes opportunities for growth (e.g. adjacent markets or sectors). You can also pinpoint cost savings. Separation can provide the catalyst for challenging operational assumptions and realising efficiencies in areas such as headquarters administration or supply chain consolidation.

The results would help to lessen the valuation haircut and ease due diligence by showing that the business is viable on a standalone basis, a view that makes the separated virtual P&L, balance sheet and operating model easier for a buyer to conceptualise, and the groundwork for transformation is in place with the potential earnings uplift is backed up by hard numbers.

Ready to go to market

However, any divestment brings distinctive challenges. If key personnel hear that the business is being sold, for example, they may begin looking for opportunities elsewhere, especially if they are top talent. Competitors may also seek to undermine any revenue generation moves – by undercutting price offers, for example. How can businesses transform to transact successfully? In our experience, three priorities stand out:

Be clear about what’s going by “setting the perimeter”

Clarify what is for sale and what isn’t upfront. Any uncertainty or change of tack on what is core and noncore will hold up transformation, delay the sale and increase the risks of losing key personnel.

Develop a clear and compelling full potential business plan for buyers and a ruthless prioritisation programme

Based on a close understanding of the business, draw up a rapid and executable plan for full transformation that a buyer could apply. Ideally, this should be broken down into a series of discrete value levers in areas such as cloud transition or moving into an adjacent market. Building on the standalone P&L and balance sheet, you can then estimate the financial uplift from each of these levers and accelerate short-term gains. You also need to be clear on the core business transformation programme so you can understand whether the disposal will yield the benefits needed.

Be ready with incentive plans for key personnel

Identify the employees who are critical to the future of the business and have incentive plans ready to help retain them. Once the deal goes public, involve them in drawing up and helping to execute plans for post-deal value delivery.

If you would like to discuss any of the issues raised in this article or find out how you can transform the value potential ready for sale, please get in touch.

We can help you deliver

At PwC we transform and transact. We have market-leading deals and tax structuring capability that work as part of a seamless sector-specific strategy, technology and execution team. We leverage the power of being in 152 countries where we know the power of local and pragmatic insight needed to realise the value from Transform to Transact.