Corporations will sell off profitable divisions for many reasons. If they are black sheep, they do not fit the long term strategic plans of the parent, if they just do not have the growth potential that the corporation wants or are just to expensive, with the parent’s corporate overheads, to manage.
A corporation looking to divest itself of a profitable division can be difficult to identify, as the current management of the division are usually the first to be offered the business and snap it up. However, there are exceptions and it is important that you keep your eyes open as these types of acquisitions are usually turn out very well for the buyer.
If the business that you are considering acquiring is a division, or a part of another company you may be faced with additional challenges if you decide to acquire it. As a division or business unit of another company you may find that there are some services that you may no longer have access to, at least not at the current costs.
For instance, a lot of companies will have bookkeepers and junior accountants within the division or business unit, however the controller for that division may be the controller for another division or for the parent company, hence when the division is severed from its current parent company it no longer has a senior finance person. Receptionist duties, if you are in a common facility with the parent or another business unit receptionist duties may have been provided. Once the division is severed from the parent company it may now be your responsibility to provide a receptionist for your new independent company. The same situation may apply in advertising, shipping, receiving and purchasing.
Other areas where common personnel are sometimes utilized include: senior quality control staff, building maintenance, safety, training, staff back up (who does reception duties when your receptionist goes for lunch or calls in sick). Other hidden expenses that you may face include, association fees, marketing and trade show fees, legal fees, contract work, employee benefits, Christmas party, sales and marketing promotional items.
It is not unusual for large corporations to supply a group of common services to its divisions. Even though most Corporations will back bill these services in some manner, it may be a lot more expensive to supply these services when you are on your own and not part of a much larger entity. If you are not relocating the facilities it may be possible to negotiate the use of some or all of the common services in your offer to purchase.
Prior to acquiring a division or part of a larger company it is extremely important to identify those services that are common and that you will loose once that group is severed from the parent. Once identified the costs of replacing those services must be included in any budgets or cash flow forecasts that you will create.
It is not uncommon for a large corporation to operate one advertising group for all its divisions. When a division is severed it no longer has access to the expertise within that group. On a similar note, many large corporations will exhibit at trade shows under a corporate banner. A large corporation will have the financial capability to expend a lot of money at a trade show. Although each division is usually billed for a portion of the trade shows, smaller divisions or business units usually receive much more than what they actually paid for. When the division is severed from its parent any and all trade show costs become the sole responsibility of that business.
I have seen situations where the segregated company did not have anyone to perform the function of shipping or receiving for its warehouse. Similarly I have seen situations where the transportation of product increased dramatically after purchase because prior to acquiring that division utilized the in-house transport department of the parent corporation.
Insurance rates, especially health care, will most likely increase due to a much smaller insured group. As an example, if previously the division was part of a large corporation that had 20,000 people, you will now have to insure that division separately and if it only has 50 people the cost of insurance per person will rise significantly.
The purchase of material and vehicles may increase because you are no longer part of a much larger buying group.
Another major area of concern that must be investigated is sales. If a portion of the sales of your newly acquired business was to other divisions of the parent that business may be lost if the only reason the business had it before was its relationship with the parent corporation.