Should You Sell a Non-Core Business or Not?
So you have been thinking of buying an item of clothing for a long time. However, since it is quite on the expensive side, you are taking a long time in deciding whether to buy it or not. You have to weigh the pros and cons. Do you have enough money to buy it? Will you still have enough money left over after buying it? How will you go about buying it? How will you pay for it?
Just a simple act of buying one item takes a lot of thought. Now, consider the other side of the fence. You have a piece of antique that you seem to no longer have any use of. Should you sell it or not? That question alone would bring about several other questions that you will have to consider before you reach a final decision. Do you need the money that you will get out of selling it? Is there any chance that you will need the item in future? How much are you going to sell it for? Who do you plan to sell it to? What terms of sale are you thinking of?
When such a trivial case – selling a piece of antique furniture or buying an item of clothing –requires a lot of thinking on your part, think about how much more it would take when you are a businessman thinking of selling some assets or even business divisions or operations. Usually, this is a predicament faced by businessmen who have non-core assets, operations or businesses.
In this article, we discuss 1) what is a non-core business, 2) what are the benefits of having a non-core business or non-core assets, and 3) reasons for selling a non-core business and how the decision process looks like.
WHAT IS A NON-CORE BUSINESS?
You must have heard of non-core assets before. These are items that are used in incidental or peripheral activities of a business, not its main operations or normal activities. That same context can be used when defining a non-core business.
Take, for example, a company with several parts or divisions that are operable as standalone businesses. The non-core businesses of this company are those that are not essential for the generation of revenue or profits. In other words, they are not the core businesses of the company. Some also include assets or businesses that are no longer used or operational in the category of non-core businesses.
Core vs. Non-Core: A Comparison
How do you differentiate core businesses from the non-core? Core businesses are those that are central to the main operations of a business organization, where the core earnings of the company are derived from. The non-core businesses are those that are only incidental to the company’s operations.
In the case of a construction company, its core business is construction of infrastructure projects such as buildings and roads. However, it also has parts that focus on making and managing real estate investments, and it may also have a division in charge of the discovery and natural resources. These are the non-core businesses of the company.
Identification of non-core businesses is not fixed across businesses, because it will depend on the nature or type of business. In the previous example, if we are talking about a real estate company instead of a construction company, the core business will be real estate, and the construction of buildings and roads will fall under its non-core businesses.
In a simple comparison, a core business is strategic in nature and focused on the improvement of customer value. It is also deemed as the “profit center” of the company. A non-core business, on the other hand, does not have a strategic view, operating instead on a day-to-day basis. It is not concerned with the primary functions of the main company, and it certainly does not qualify as a profit center for the company.
BENEFITS OF HAVING NON-CORE BUSINESSES
Does this mean that non-core businesses are useless, or of no use at all to the business? Not necessarily. If core assets are said to be crucial to the success of a business, there are also benefits to owning non-core businesses or assets, such as real estate, commodities, currencies, high-yield bonds and stock options.
They improve the company’s net worth.
In many cases, non-core businesses of a company are also indicators of that company’s overall health. When assessing the overall health of a company, attention is not always focused on the main or core operations, because others may tend to also consider the peripheral operations or businesses.
On paper, the Asset section of your Statement of Financial Position will definitely look good. Aside from having a higher amount of assets, the company’s asset portfolio will also be diversified with the inclusion of these non-core businesses, which always add favorable points for the company that owns them.
When investors are evaluating whether to put their money to a business or not, they tend to look at the overall picture, not just the core assets. They will also look into the non-core assets, or those that tend to be hidden, in order to come up with an informed decision on whether the company is worth investing in or not.
They may serve as cushions for the company.
Businesses should always have backup plans, and there are many companies that look at non-core assets or businesses as their backup plans. They act as cushions in cases of emergencies, such as when the company has an immediate need for cash or injection of capital, then they can use these non-core businesses to raise the funds that are needed.
They add to the company’s net profit.
Aside from your core earnings, or the earnings generated from the core activities or businesses of the company, you may also gain earnings from these non-core businesses. Yahoo, for example, is known for its core internet business, primarily on advertising on its different websites and the search engine.
However, that is not the only source of income for the tech giant, since it also generates earnings from its non-core businesses, which includes several online companies (such as Tumblr and Flurry), as well as patents and intellectual property rights.
REASONS FOR SELLING A NON-CORE BUSINESS
Some business analysts flat out say that non-core businesses are business that you should not be running or operating AT ALL. They should immediately be stopped or divested. This is not an easy thing to do, however, and some businesses find it difficult to simply let go of these units. However, with the proper motivation and the right reasons, selling a non-core business may be justified.
In some parts of the world, the practice of selling non-core businesses is also becoming more commonplace, sometimes with governments having their say in the matter. In June 2015 in India, for example, the Finance Ministry stepped in and asked state-run banks to dispose of their non-core assets by selling them and using the money to reduce debt.
Here we will take a look at the reasons why you should consider selling your non-core business.
To prioritize resources and refocus business strategies.
Stopping, disposing or divesting of a non-core business will free up time, money, and other resources that you can allocate to your core businesses. Also known as “carve-out transactions”, where a smaller part (the non-core business) of a larger company is sold, this will allow the company to focus on its core business, purely operating on where it gets its core earnings.
Often, non-core businesses are described as “expensive distractions”. They are even equated as “excess baggage” by some. They are there, but they are not helping. They are not your main operations, but they require significant amount of resources to keep running. The worst part is that your core operations may be suffering, because you have allocated resources to your non-core businesses, leaving your core business having to deal with resource shortage.
Have a look at this checklist on deciding whether an activitiy is core or non-core to your business.
As an example, UK supermarket chain giant Tesco has decided to refocus on its core business, which is the supermarket. Therefore, it sold off Giraffe, a restaurant chain in the UK, and Dobbies Garden Centres, a garden retail chain. This, according to CEO Dave Lewis, was Tesco’s attempt at focusing on its core strengths. It will come as no surprise, then, if Tesco also sells off its remaining non-core businesses, which include the coffee shop chain Harris & Hoole.
The refocus will not only strengthen the current operations, but also strengthen the brand or brands of the company. When it comes to consumer goods, British company Reckitt Benckiser, or simply RB, is a major player, with several well-known brands under its belt. But when it announced its plans to sell some of what it identified as “non-core brands”, the reason they cited was because “they did not make it to their power brands list”. These non-core brands, which include health drink brands Robinson Barley and Purity and fabric whitener brand Robin Blue, apparently registered a decline in sales over the past years, spurring the decision of the company to sell them.
Cash generation for working capital management.
At some point, the company may find itself strapped for cash, for example, to meet increasing working capital requirements. Liquidity may become a problem and its other resources may be tied up.
A quick monetization solution would be to sell its non-core assets or businesses. This will save the company from having to take out short-term loans from banks or other lenders, because it can easily raise the money on its own.
For reduction of indebtedness.
Companies may also opt to sell their non-core businesses and use the proceeds to reduce their indebtedness. Debt restructuring will definitely benefit greatly from a well-planned and implemented divestiture or sale of non-core assets.
This was what Canada’s Advantage Oil & Gas Ltd. did when it sold all of its remaining non-core assets for a total consideration of $74.3 million in cash, debenture and shares of stock. The proceeds were used to pay off Advantage’s outstanding bank loans.
This will also trickle down to the improvement of a company’s credit rating, thereby putting it in a better position in the business community. In the future, when it enters into loan transactions and other similar transactions, they can rely on their good credit reputation to carry them through.
The company may be thinking of expanding its core operations, or entering a new market. Obviously, these will entail infusion of capital. Instead of seeking external sources of capital such as lenders, banks, investors and venture capitalists, the company may prefer to raise capital internally.
One of the ways to do that is to sell some or all of its non-core businesses. The proceeds from the sale will then be used to fund the expansion of core businesses.
For cost-cutting purposes.
Especially lately, large corporations look at divesting its non-core businesses as part of their cost-cutting initiatives. Even if non-core businesses are not central to their operations, the company will still have to incur costs on them. They would still have to pay the salaries and wages of employees assigned to these businesses. The businesses will also be incurring operational expenses, such as on utilities and administration. In addition, the real properties and fixed assets used in the non-core activities are also subject to depreciation.
In one of the more recent non-core asset sales, British banking group Barclay’s sold its insurance operations in Italy, and they estimate their total annual costs to decrease by roughly €5 million.
For consolidation of financial position.
Large corporations with more than operational division may have trouble consolidating its financial position. After all, there are many angles to look into. This was the case with Devon Energy Corporation, an American oil and gas company that sold its upstream non-core businesses for close to $1 billion. This supported the company’s plan to streamline its asset portfolio and consolidate its financial position.
The streamlining process will then enable management to take a better look at its company and its performance, and make decisions related to its future growth and profitability. When a non-core business is no longer deemed to be a strategic fit to the company, and it does not have the scale to improve the financial position and does not contribute anything to the advancement of the goals of the organization or parent company, then it is a good idea to sell it.
To improve overall profit margin.
Sometimes, we have to let go of underperforming businesses and ventures. It is possible that one of the peripheral units or businesses of a company may be incurring net losses from its operations and, when taken in the general books of accounts, they can bring down the company’s overall profit margin. The wisest choice would be to discontinue these non-core businesses.
Let us once again take a look at Tesco. Aside from UK operations, it also has businesses operating in different parts of the world. For example, it used to have a grocery business in Istanbul, Turkey, which it listed as a non-core asset and sold off to a local competitor Migros. This move was in recognition of the fact that the grocery business was one of its underperforming businesses overseas.
For organizational restructuring.
Companies may also want to implement a reshuffle in their organizational structure, and one way to go about it is to lower the number of departments. It is possible that an organizational audit showed several redundant positions and designations, attributed primarily to non-core businesses.
By selling some of these non-core businesses, the number of departments or units will be reduced, and the organizational structure, as a whole, will be leaner.
MAKING THE DECISION
So should you sell your non-core business or not?
The answer should be YES, if:
- The company is in need of cash for its core operations, for capital expenditure or expansion, and there are no other ways of raising the needed cash or capital;
- The company’s debt position is precarious, and outstanding debts need to be settled immediately;
- The company’s non-core businesses are incurring losses and are draining company resources used in its core businesses;
- The company’s core operations need more attention and non-core businesses are taking up a lot of top management’s time.
- Doing so will increase shareholder value and improve the financial position of the company.
In another non-core divestiture example, Royal Dutch Shell, another oil and gas company, cited several reasons for its plan to sell close to $40 billion of its non-core businesses.
- Shell’s takeover of BG Group in February 2016 made it the largest publicly-owned company in Britain and the largest producer of liquefied natural gas in the world. However, it also left Shell cash-poor.
- The merger also resulted in Shell’s liabilities reaching close to $81 billion, a sharp increase from $43.84 billion before the takeover. Shell’s CFO, Simon Henry, estimated that the sale will enable the company to reduce its debt by more than $50 billion over the next four years, until 2020.
- Selling its non-core businesses was one of Shell’s attempts to cut its capital expenditures on these businesses.
Clearly, the decision on whether you should sell your non-core assets or not (yet) will depend on the results of in-depth analysis, whether the benefits of keeping them will surpass the costs that will be incurred by the company.