Disinvestment is the process of selling off assets or liquidating business assets. This process is also followed by the government often. The government often sells off its subsidiary assets.
But why does disinvestment happen? Why do small businesses have to go through disinvestment? Typically, it can be because a business is trying to repay its debt or gathering funding to focus on the existing business. Businesses also consider disinvestment to restructure operations, improve cost efficiency, and improve the overall business.
It plays a crucial role in shaping the economic policies and strategies of a business. So, if you are a small business owner, you must understand what it means and the procedure to go through it. This article should help you understand why disinvestment is important and how your business can use it for benefit.
What is Disinvestment?
Disinvestment is a process to liquidate the assets of an organization or the government. It is the way to sell off the assets held by the business or the government to pay debts. This can take different forms, including the sale of an entire stake or partial disinvestment, where it’s difficult to retain a minority interest.
When a business or the government considers disinvestment, it is done for different reasons. The most common ones include the following –
Strategic: this way, a business can shift its focus to a more lucrative product or a market.
Political: for promoting more efficient management of enterprises by private sectors.
Environmental: This is done to reduce the risks related to controversial companies.
But if we trace the most common methods for disinvestment, it will include transferring ownership from the public to the private sector and a minority of the stakes sales, allowing the governments to raise their capital while continuing to manage some control.
Types of Disinvestments
Disinvestment in business can be of different types. Businesses choose different options based on their financial situation.
Here are the most common types of disinvestments that you need to know about –
Strategic Disinvestment
When a company is undergoing strategic disinvestment, they are considering the sale of a large portion of its stake. It could be due to any of the three reasons we have explained above.
Monitory Disinvestment
This is a disinvestment process companies often go through to sell small portions of the company assets. This type of disinvestment deals with the conversion of money claims or securities into cash or money.
Total Privatization
A company sells the majority of the ownership of the company to a buyer. This is also called total privatization.
Carrier divestiture
When a company sells the network assets to another operator, it is also a type of disinvestment. This is a type of disinvestment where Carrier Global Corporations sell off different parts of the business; for example, a company selling off their refrigerator unit.
Why Disinvestment Is Important?
Companies choose to disinvest for different reasons. It can be to repay a debt or to liquidate their assets to invest elsewhere for more profit. Here are some most common reasons why companies disinvest –
Resource Allocation
This type of disinvestment helps businesses to relocate their assets to more profitable business avenues. These disinvestments help small businesses focus on their strength and mitigate weak areas where they may have invested before.
Shareholder Value
Businesses often use the proceeds from the sales assets to buy back their stocks. Many businesses use this disinvestment tactic to enhance their shareholder value. Companies reduce the number of shares outstanding to increase their per-share income. Thereby, they appear to be more profitable options to their investors.
Market Exit
Sometimes, businesses choose disinvestment to exit a market. This way, they minimize their losses. This is a decision that an increased level of competition can influence. Sometimes, market exit is an option when the business is struggling to comply with the regulatory parameters.
Strategic Restructuring
When a business considers bankruptcy, it must liquidate its assets to repay the outstanding debt. This is a way to generate cash to repay the creditors and maintain other business obligations to improve financial stability. This is also a good way to build your creditworthiness.
Focus on Core Business
Disinvestment is also a way for small businesses to focus on the main business. Sometimes, small businesses venture into territories other than those making money for them. If these ventures incur a loss, they have to get back to their old business, which requires selling off the weaker assets.
Strategic Restructuring
Sometimes, disinvestment is also a way to reduce errors within the business operations, reduce cost, and improve business profitability. This functionality also helps in integrating operation along with how to come out of these operational responsibilities.
How to Carry Out Disinvestment?
A small business or the government would carry out disinvestment in different ways. Some businesses disinvest by using methods like going public through IPO (initial public offering) or OFS (Offer for Sale). Companies can also consider a direct sale or a private investor, depending on the scenario.
Here are the specific methods for disinvestment –
IPO
IPO is the process of issuing new shares of a company for the first time. This is when a company goes public and makes its shares available to individual buyers through stockbrokers. This way the business allows the government to slowly reduce its stake.
Offer for Sale
It’s a direct sale tactic to sell off existing shares to institutional investors via a stock exchange. A simple way to explain this is: offer for sale is a process where the shareholders of a company sell off the company shares to the public.
Private Placement
Selling shares directly to a select group of investors is often used for larger transactions. The company sells security to a small group of investors which is called private placement.
Auction Process
Another way of liquidating the assets of a small business is through the auction process. This is the way to identify the highest bidder for making the highest sales.
Things to Consider When Choosing Disinvestment
The process of disinvestment isn’t a very easy and simple one. A business must comply with the regulatory frameworks, public companies, and must make strategic considerations when choosing this path.
Here are a few things a small business must remember to ensure smooth disinvestment of their assets –
Regulatory Framework
The entire process of disinvestment is overseen by the SEC. They oversee the process of selling shares and ensure compliance with the relevant government regulations. They also ensure that compliance with disclosure requirements is met.
Public Companies
Most disinvestment Companies in the USA involve selling off their shares of publicly traded companies. More people will work on those things you need to
Public companies
Most disinvestment activities in the USA involve selling shares of publicly traded companies, allowing for broader market access to potential buyers. This way, the companies can cash out more of their investments.
Strategic considerations
Before a company decides to liquidate its assets, it must consider the assets it must disinvest in. This is when they must consider different things like market conditions, potential buyers, and the impact of it on the overall business.
Challenges of Disinvestment
When a business plans to disinvest and sell off its assets, it must consider several points that affect the affiliated bodies.
Here are some challenges a small business might face when selling itself –
- Labor issues may arise due to job losses.
- Landowner issues due to assets getting disinvestment can also cause a challenge.
- It’s also not easy to identify non-core assets, which hardly attract any market interest.
- The market keeps fluctuating, which can affect the business process and the disinvestment of assets.
- What are the challenges of valuation?
- Due to job losses and business changes, some social impact can be disrupted by the local communities.
- Also, disinvestment can also put a small business through regulatory issues.
Conclusion
For small businesses, disinvestment is a way to strengthen the core business functions or reduce weaker sections of the business. However, it’s important to consider challenges like job loss, regulatory issues, etc.
If it’s a solution helping the business go through phases like bankruptcy, then it’s a worth considering decision. However, owners must consult with the stakeholders before making the final decision and maintain all legal compliances.
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