Before “in with the new,” first must come “out with the old.”

But many corporations around the globe trying to sell off parts of their businesses admit they are having a tough time. And when they do sell, they’re not getting the desired price, according to EY’s 2021 Global Corporate Divestment Study, which was published today. Conducted between January and March 2021, the data is based on a survey of 1,040 global C-level executives and 27 global activist investors. 

Reasons for the current challenges? Ineffective preparation and waiting too long to make up their minds on a sale.

“Our study found that 79% of respondents failed to meet price expectations for their most recent divestment,” says Rich Mills, EY global and Americas sell and separate leader. 

Mills continues, “This is due to ineffective preparation of the business for sale before engaging with potential buyers to inflated price expectations based on how the company is performing. The latter is often due to delaying the decision to divest.” And the result is often “a cycle of lower capital investment that diminishes the operating performance of the business,” says Mills. 

The majority (78%) of companies said they held onto assets too long when they should have sold them, according EY.

The research found that it’s not a specific type of business that companies have a hard time selling, says Mills. The issue is “the stage of the lifecycle in which the business currently operates,” he says. 

Mills explains (bolds are mine): For example, a capital-intensive business that has been underinvested for several years due to a company allocating capital to higher growth businesses within the portfolio will not be an optimal performer for a potential buyer. This often provides disconnects between historical performance and the forecast presented to buyers, which results in underbidding by buyers given they will have to invest outsized capital to achieve desired results.

So why did the companies hold on to these businesses for so long? Turns out it could be an emotional attachment. 

“There are several challenges that range from legacy emotional attachment, internal politics to difficulty making the decision to divest a reasonably performing business with predictable revenue and cash flow contributions,” Mills explains. 

He offers a solution: “We believe the best way to remove such obstacles is to better link divestment decisions to the company’s strategy of long-term value creation. If it is clear a particular business does not fit into this strategy, it should be divested with the proceeds reinvested into higher-impact opportunities. This linkage removes emotion or reactions to short-term performance metrics. 

As stakeholder demands and market conditions change, companies can reassess what the value drivers are in the business. Even well-performing businesses can be on the chopping block, if they no longer fit the long-term strategy, according to EY.

A CFO can step in if there’s an instance where “the cyclical nature of a business unit can entice a company into holding onto it,” the report found. 

Suggested alternatives for CFOs to recommend include an “asset-light” approach.

One example? Dow’s sale of its U.S. and Canadian rail infrastructure in July 2020 for about $310M, according to the report.  The transaction included a long-term service agreement with the buyer, Watco, a logistics firm. So Dow was able to maintain the necessary services while removing the rail assets from its portfolio, EY explained in the report. 

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

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Leaderboard

Bob Mack was named EVP and CFO at Polaris Inc. Mack has been serving as interim CFO since January 2021.

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