What metrics should you use to evaluate divestiture performance?

Divestiture is the process of selling or spinning off a business unit, division, or subsidiary to another entity. It can be a strategic decision to focus on core competencies, improve financial performance, or respond to changing market conditions. However, divestiture is not always a straightforward or successful move. How can you measure the impact of divestiture on your company's value and performance? Here are some metrics that you should use to evaluate divestiture performance.

1 Accounting metrics

Accounting metrics are the simplest and most common way to assess divestiture performance. They include revenue, earnings, cash flow, and return on assets (ROA). You can compare these metrics before and after the divestiture to see how the remaining business has changed. You can also compare them with the industry benchmarks and peer groups to see how your company stands in the market. Accounting metrics can help you understand the financial health and efficiency of your business, but they have some limitations. They do not capture the opportunity cost of divestiture, the synergies or conflicts with the buyer, or the future growth potential of the divested unit.

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J. Gerardo Camargo Seemann

30 años Creando Patrimonios donde aún No Existen | Leaf & Arcaro M. Director | Asesor Financiero Certificado | Speaker-Conferencista | Ex Director de Banamex & Scotiabank |
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Medir el rendimiento de tus inversiones es crucial. Te muestro algunas técnicas: 1. Rendimiento ponderado en el tiempo: calcula la tasa de crecimiento anual compuesta, considerando entradas y salidas. 2. Rendimiento ponderado en dinero: ajusta rendimientos según flujos y tiempo. 3. Rendimiento relativo: compara con índices o alternativas similares. 4. Comparación entre pares: evalúa contra otras carteras.

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Hannah Fisher

Director of FP&A at Pacifica Beauty I I write about business, finance & working parenthood|10 years in finance
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Accounting metrics are probably the first and simplest step to get a better idea of the company's financial performance. However, since accounting only looks backwards, these metrics will only capture historicals without taking into account other potential future costs or benefits, opportunity costs and other potential conflicts or opportunities that can't be captured in your financials.

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2 Market metrics

Market metrics are based on the stock price and market capitalization of your company and the buyer. They reflect the expectations and perceptions of the investors and analysts about the divestiture. You can use market metrics such as abnormal returns, cumulative abnormal returns, and Tobin's Q to measure the value creation or destruction of divestiture. Abnormal returns are the difference between the actual and expected stock returns around the divestiture announcement or completion date. Cumulative abnormal returns are the sum of the abnormal returns over a period of time. Tobin's Q is the ratio of the market value to the book value of your company's assets. Market metrics can help you evaluate the market reaction and the strategic fit of divestiture, but they are also influenced by external factors such as macroeconomic conditions, industry trends, and investor sentiment.

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Ashutosh Kar

Founder & CEO | Advince - Your Trusted Partner for Global Finance & Legal Consulting | Advince Books - Online Accounting Software for Seamless Financial Management
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Assess the impact of the divestiture on the company's stock price and market perception. Positive market reactions, such as an increase in share price or favorable analyst recommendations, indicate confidence in the divestiture decision.

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3 Operational metrics

Operational metrics are related to the business processes and capabilities of your company and the buyer. They include customer satisfaction, employee retention, innovation, quality, and productivity. You can use operational metrics to measure the operational performance and competitive advantage of divestiture. You can also use them to monitor the integration or separation challenges and risks that may arise from divestiture. Operational metrics can help you improve the execution and outcomes of divestiture, but they require more data collection and analysis than accounting or market metrics. They are also more subjective and context-specific than financial or market metrics.

Divestiture is a complex and dynamic process that requires careful planning, execution, and evaluation. You should use a combination of accounting, market, and operational metrics to capture the different aspects and impacts of divestiture performance. You should also align these metrics with your strategic objectives and adjust them as needed. By using the right metrics, you can make better decisions and maximize the value of divestiture for your company and your stakeholders.

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J. Gerardo Camargo Seemann

30 años Creando Patrimonios donde aún No Existen | Leaf & Arcaro M. Director | Asesor Financiero Certificado | Speaker-Conferencista | Ex Director de Banamex & Scotiabank |
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Tener siempre en cuenta las tarifas y gastos en la rentabilidad de tu cartera es esencial: Analiza la estructura de tarifas: conoce los costos de gestión, índices de gastos y transacción, y cómo influyen en tus rendimientos. Luego, compara las tarifas entre diferentes opciones, elige las más bajas sin comprometer tus metas o tolerancia al riesgo. Considera también las implicaciones fiscales, especialmente en cuentas sujetas a impuestos, busca asesoría fiscal. Por último, evalúa el valor de los honorarios: aunque pueden reducir la rentabilidad, pueden ofrecer acceso a conocimientos profesionales o inversiones. Determina si los retornos compensan las tarifas. Es fundamental ver estos aspectos para optimizar tu desempeño financiero.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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J. Gerardo Camargo Seemann

30 años Creando Patrimonios donde aún No Existen | Leaf & Arcaro M. Director | Asesor Financiero Certificado | Speaker-Conferencista | Ex Director de Banamex & Scotiabank |
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Para evaluar el desempeño de tu cartera, debes considerar varias métricas e indicadores clave. Éstos son algunos de los esenciales: 1. Rendimiento total. 2. Rentabilidad anualizada. 3. Métricas de riesgo 4. Ratio de Sharpe. 5. Error de seguimiento

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What metrics should you use to evaluate divestiture performance?

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1 Accounting metrics

2 Market metrics

3 Operational metrics

4 Here’s what else to consider

Corporate Finance

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