As companies grow, they often acquire assets, create new business lines or purchase companies or portions of companies to achieve market penetration and sales objectives. Growth might also mean a company's markets and operating environments change, often resulting in strategy shifts.

When a firm changes its strategy, it may opt to divest assets, business lines or subsidiaries that no longer fit with their business or that underperform in other areas of their business.

Any divestiture has pros and cons.

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Divestitures help companies maintain their strategic focus. Divesting assets with poor profitability frees up internal assets, which the company can use to strengthen its other businesses. It also provides cash to purchase or improve assets that can enhance profitability.

One potential disadvantage of a divestiture is the negative impact on a company's cost structure. If the unit received significant marketing, accounting or operational support from the parent company, it may not receive the same level of support as a stand-alone entity or under its new owners.

Definition of Business Divestitures

When referring to corporations, a divestiture involves the sale, spinoff or shutdown of a business unit, division or subsidiary. For small businesses that have no legally separate business units, a divestiture generally involves the sale or disposition of a long-term key asset.

A small business divestiture may also involve the sale of a line of business.

Advantage: Strategic Focus

Companies often divest assets and business units that no longer fit with the company's core business. Divesting therefore helps companies maintain their strategic focus.

Companies also divest underperforming assets. Divesting assets with poor profitability frees up internal assets, which the company can use to strengthen its other businesses. It also provides cash to purchase or improve assets that can enhance profitability.

Advantage: Transparency and Value

Divestitures also provide greater operational transparency in companies with large and diverse businesses and activities. Transparency is a greater concern for companies that have multiple lenders and investors who are not typically privy to the same information that owners and managers are.

The overall benefit of divesting is the increase in value that results. The streamlined focus, increased transparency, freed resources and cash received all help drive a higher overall value for the remaining company.

Disadvantage: Costs No Longer Shared

One potential disadvantage of divestitures is the negative impact on a company's cost structure. If a company has spread its fixed costs – including rent, maintenance, personnel allocation and administrative support – over two or more business units, the remaining business units must now absorb those costs.

In addition, companies may encounter difficulty re-allocating personnel, as some employees may perform work for more than one business unit.

Disadvantage: Contractual Obligations

A divestiture has other disadvantages. Partnership agreements, support agreements and vendor contracts may contain mentions of the divested business. These contracts must either go with the divested business or undergo modification to remove the references.

Yet another issue with divestitures is support. If the unit received significant marketing, accounting or operational support from the parent company, it may not receive the same level of support as a stand-alone entity or under its new owners. Therefore, the divested unit may require long-term support.