Business Triage: Non-Essential Asset Spin-Off

By Trip Holmes

It’s natural for entrepreneurs who’ve built successful middle-market companies to think they can grow their way back out of a downturn like the one we’re facing with the COVID-19 pandemic. And while bolstering revenues is certainly a cure for many problems, what happens when your market greatly diminishes, and you’re forced into survival mode?

There are many measures you can take to protect your business while revenue is down. In our last article, we discussed your options with regard to your corporate debt, including loan modifications and loan workouts. Today, let’s take a look at spinning off non-essential assets.

What Are Non-Essential Assets?

Over time, companies evolve moving into and out of certain markets and operational modes. Thus, they can acquire assets that become less relevant to their core business operations as times change. Spinning off non-essential assets can be one of the best ways to raise cash and paying off debt during a downturn, without upsetting your main business and its ability to rebound.

Non-essential assets can take many forms: 

·      Subsidiaries or divisions of the company

·      Excess real estate holdings

·      Idle equipment

·      Raw materials

·      Investment securities

It’s important to note that these assets resemble many of your essential or core assets. The difference is that your core assets are necessary to operations and maximizing revenue, while non-essential assets are inactive or simply not contributing to the bottom line. Other essential assets can include delivery vehicles, distribution channels, and even intellectual property like trademarks and patents.

Hidden Value Paves the Way Forward

From my 35 years of experience in working with middle market businesses, I’ve helped many founders spin off non-essential assets. Sometimes, it’s the rather simple matter of bringing in an auction partner to move out some unnecessary equipment that’s still in good condition. And sometimes, it’s parceling off a real estate holding and finding the right buyer. 

But at other times, it’s more complicated, but with greater reward. 

Just before the pandemic hit, we helped a business owner spin off a division of his parent company and put a seven-figure check in his pocket.  Prior to our engagement, he had planned on simply winding down that division because—you guessed it—the division was no longer essential to his overall operation. However, there were thousands of clients using legacy technology designed specifically for their field of business.

While the legacy technology made that customer base largely non-essential to my client, that wasn’t the case when we tested the market. We found a buyer that craved that customer base for its international scope, with deep and established relationships.  The buyer saw the immediate opportunity to convert the legacy technology to cutting-edge technologies, complementary equipment, products, and services.  The division was easily integrated to become a profitable and essential part of the acquiring company.  

In every downturn, there are those who go out of business and those who fight to live another day. Is your company fighting for its survival? If so, we can help you survive the pandemic and its resultant market conditions, strengthen your balance sheet, and leave you poised for an even better tomorrow. Our business triage services, like spinoff of non-essential assets, were designed with these adverse situations in mind. Contact us today to get started!