​It’s no secret that frequent acquirers that make mergers and acquisitions a key part of their strategy outperform their peers over the long-term in total shareholder returns (TSRs). But what’s less well-known is that those winning companies also have a tight process for systematically evaluating their portfolios and shedding noncore, low-growth, or underperforming assets to double down on the areas with the highest growth potential and to simplify for profitability. Our research found that 90% of outperforming frequent acquirers actively divest (see Figure 1).

Figure 1

Every divestiture is a value creation opportunity. But there’s a huge gulf between companies that focus on just getting to Day 1 and those that use divestitures to reset the remaining company and increase shareholder value.

Indeed, just splitting and selling an unwanted business leaves value on the table—on top of an already onerous deal process, base businesses often are plagued by everything from stranded costs to distracted employees and a buyer that lacks a clear plan for value creation. When we evaluated individual deal performance among sellers, we found that the average remaining company underperformed the market after divesting, while top-quartile divestors delivered TSRs that were three times higher than the market (see Figure 2).

Figure 2

What do these high performers do that sets them apart? It all starts by creating a solid separation thesis and value creation story to enable effective execution with the right team and the right focus.

The best divestors create a separation thesis that prepares both the divested company and the remaining company to deliver value. It articulates why the divested company will perform better with another owner, it creates an asset perimeter that attracts the right buyer pools, and it builds a target profit and loss statement (P&L) that reinforces the story. At the same time, winners use each divestiture as an occasion to reshape the remaining business to optimize costs and boost growth.

That’s not to suggest that divestitures are easy on a seller. For starters, just obtaining board approval for a divestiture requires thoughtful planning and coordinating with other priorities. And divestitures test executives’ decision-making abilities on everything from designing an appropriate asset perimeter that will deliver value to a buyer to working through transition service agreements (TSAs) and managing talent in the interim. Sellers need a clear view into stranded costs and a plan in place to mitigate. They deftly need to balance speed, base business performance, and value creation.

We see five key steps to take for executives planning to divest.

Step No. 1: Start with a holistic view of your portfolio, and mark businesses for exit in line with your strategy. There are some basic questions to ask: What is the divestment thesis that provides the strategic rationale for this exit? Why are you selling? Are there still parenting advantages you have over the business? Where are there shared customers and capabilities? What is the sum-of-the-parts analysis, and where are investors discounting the business? What structure can deliver the highest value? The best divestors take a future back, objective lens and understand the parts of the business that do not match their portfolio.

Step No. 2: Aim to maximize value through perimeter design, transaction structure, and exit timelines; do not just split the business. Think through the right bundle of businesses and supporting people, assets, systems, and IP. The optimal perimeter often balances two things: ensuring attractiveness to the right buyers and minimizing stranded costs for the seller. For largely standalone business units, tax-free spin-offs can minimize tax leakage of deal proceeds. On the other hand, divestiture is often faster and requires a lower one-time cost to execute for partial businesses or businesses requiring a turnaround. Consider the need for cash and how proceeds will be reinvested as well as the trade-offs associated with maintaining deal optionality for longer (e.g., to maximize exit value) vs. prioritizing transaction speed.

Step No. 3: Set the right objectives for Day 1 and beyond. Divestitures are a lot of work, and it’s tempting to declare victory on Day 1 when the transaction closes. This view fails to account for the impact of TSAs, commercial agreements, and stranded costs to the remaining company. Top-performing divestors recognize the transaction is an opportunity to reshape the P&Ls of both the divested company and the remaining company. Building the pro forma P&L and disentangling the businesses will often expose stranded costs and bloated cost structures in the remaining company. Even for businesses that are already largely separate, there can be an opportunity to shift investments to areas that line up with the remaining company’s new focus.

Step No. 4: Accelerate decisions on the biggest entanglements. When we asked practitioners to name the top inhibiting factors for divestitures, functional entanglement was No. 1. Depending on the industry, the biggest entanglements often are around systems, shared production, and route to market. Thinking through how to disentangle the business in a way that ensures operational stability while minimizing stranded costs and one-time costs can be a complex equation. While it may make sense to disentangle certain parts of the business ahead of Day 1, strategically placed TSAs can provide breathing room for the divested asset to organically build up functional capacity, transition to new systems, and more, while also serving to mitigate stranded costs for the seller until the right go-forward solution is identified and executed against to rightsize the business.

Step No. 5: Keep 95% of people 100% focused on the base business. Again, running a divestiture can distract from the base business. Such distractions can harm the growth and performance of both the divested company and the remaining company, which can destroy more value than the separation creates. The best companies keep a focus on the base business by running a divestiture program with fewer, more highly dedicated individuals.

When executed strategically, divestitures serve as a powerful tool for companies to streamline operations, focus on core competencies, and enhance shareholder value. Bain & Company's extensive research indicates that companies adopting a proactive and disciplined approach to divestitures outpace their peers. These five steps can make the difference between companies that underperform the market and those that use divestitures for outsized growth and value creation.​