Divestment Readiness: A Critical but Often Overlooked Component of the M&A Lifecycle

As part of our ongoing thought leadership series on mergers and acquisitions (M&A), this article examines a frequently neglected — but strategically vital — element of the deal lifecycle: divestment readiness. Often underestimated or bypassed due to time pressures, inadequate planning, or insufficient advisory support, this phase is instrumental in driving both process efficiency and transaction value.

At Kensington Capital, we have advised on numerous transactions across sectors, jurisdictions, and deal sizes. Regardless of scale or complexity, one recurring theme stands out: insufficient upfront preparation continues to hinder optimal outcomes for sellers.

Slowing Down to Accelerate Value

Our consistent counsel to clients is simple but counterintuitive: slow down at the outset. Robust planning and early actions will unlock speed, value, and control later in the process. Rushing into market without adequate preparation significantly increases the likelihood of valuation erosion, process fatigue, or even transaction failure.

Our divestment readiness framework is designed to ensure that both the business and its leadership are fully prepared — financially, operationally, and strategically — prior to initiating a sale process or approaching potential acquirers.

What Does Effective Preparation Entail?

Many sale processes are prematurely initiated, often in response to opportunistic buyer interest or a desire to capitalise on perceived market timing. We typically advocate for a dedicated 8–12 week preparation window, during which the business and its management team undertake targeted readiness initiatives.

Key elements include:

• Robust discussions with management to unpack strategic objectives
• Internal financial (model) preparation
• Stakeholder alignment on valuation expectations
• Execution of a robust quality of earnings (QoE) analysis
• Development of marketing materials
• Preliminary buyer mapping and soft market soundings

Quality of Earnings: Far More Than Just EBITDA

A QoE assessment is not a mechanical calculation of EBITDA. It is a structured, in-depth interrogation of the company’s earnings profile — typically involving direct engagement with management — to isolate adjustments that more accurately reflect sustainable operating performance.

Such adjustments often include:

• Normalisations: Removing non-recurring, exceptional, or discretionary items
• Add-backs: Reinstating owner-related or personal expenditures
• Deductions: Excluding one-off income streams or gains unrelated to operations

This exercise ensures that reported earnings are an authentic representation of the business’s core profitability — essential for credible valuation and investor confidence.

Why Normalisation of Earnings Matters

1. Accurate Benchmarking

Normalised financials allow for meaningful comparison—either against peer businesses or historical performance — by eliminating distortive items.

2. Valuation Integrity

Adjusted EBITDA is often the primary basis for valuation discussions. Clear, defensible figures protect the seller’s position during negotiations.

3. Buyer Confidence

Transparency in earnings builds trust with potential acquirers, reducing diligence friction and enhancing perceived deal quality.

Typical Adjustments in QoE Analysis

A. Add-backs (increase EBITDA):

• One-time restructuring or legal costs
• Owner salaries, non-arm’s-length compensation
• Non-business-related travel or discretionary spend

B. Deductions (decrease EBITDA):

• Non-core income (e.g., sale of assets, subsidies, grants)
• Volume-based rebates or discounts unlikely to continue
• Revenue unrelated to recurring operations

C.     Other critical adjustments may include:

• Rent adjustments where below or above market
• Removal of capital expenditure incorrectly expensed
• Reclassification of “lifestyle” expenses in founder-led businesses

The Importance of Vendor Due Diligence (VDD)

For more complex or larger-scale transactions, we frequently recommend conducting Vendor Due Diligence (VDD). Unlike traditional diligence led by the buyer, VDD is initiated by the seller prior to going to market and covers financial, tax, and legal domains.

The benefits are two-fold:

• Risk mitigation: Identifies potential red flags early, enabling remediation or expectation management
• Process efficiency: Reduces surprises, compresses buyer diligence timelines, and builds credibility

In some cases, VDD has led to a prudent pause in the sale process — saving clients significant advisory costs and protecting transaction value.

High-Quality Marketing Materials: More Than Just a Teaser

Another area often underestimated is the quality and timing of marketing deliverables. We routinely observe sellers launching with only an investment teaser — a high-level document — while delaying the delivery of the Information Memorandum (IM). This gap can stall momentum and erode buyer interest.

Professionally prepared, well-sequenced materials will:

• Set the tone for the process
• Reflect management’s professionalism and readiness
• Influence the quality and seriousness of bidder engagement

The Bidders List: Precision Over Volume

One of the most critical, yet frequently mismanaged, components of the sale process is the preparation of the bidders list. Too often, we encounter generic compilations — industry directories or investor databases repackaged as buyer targets.

We take a more rigorous approach:

• Strategic workshops with management
• Confidential soft soundings within our network
• Data-driven filtering using platforms like Capital IQ or Bloomberg
• Alignment of buyer profiles with strategic rationale and capital appetite

A high-quality bidders list is curated, confidential, and credible — not a numbers game.

Why Rushing to Market Is Risky

Launching a sale process without undergoing proper divestment readiness introduces significant risks:

• Valuation compression due to under-preparedness
• Management distraction and deal fatigue
• Loss of buyer confidence
• In worst cases, failed processes and reputational damage

A business exit is often the most significant financial event in a founder’s or owner’s career. After years — sometimes decades — of value creation, this milestone deserves strategic patience, professional discipline, and meticulous execution.

Conclusion: Preparation Is Not a Delay — It’s a Strategy

Divestment readiness is not a nice-to-have — it is a strategic imperative. It underpins valuation, safeguards credibility, and ensures that a transaction process is executed with confidence and control.

As advisors, our mandate is to help clients maximise value and minimise risk. In our experience, the best way to do that is to begin not with the sale itself, but with readiness for the sale.

Contact Us for A Free Consultation

#kensingtoncapital #MergersAndAcquisitions #CorporateFinance #Divestments #Repost #TheUpsideOfExperience

Link to LinkedIn article