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It is an art to find and implement new business ideas. It is a sign of maturity to acknowledge when businesses reach the end of their lives.
Given the pace of economic and societal disruption that we see today, both challenges above have been fully thrust into the hands of business leaders with a level of urgency for action and execution never witnessed before.
COVID-19 has proved an accelerant to many existing disruptive trends, while new trends have also emerged from the turmoil of the past 12 months alone. Proven operating models are ripping at the seams, affecting entire value chains and established processes and threatening the survival of many established companies.
While firms affected by these forces strive to pivot and innovate to initially survive, then position themselves to thrive post-pandemic, at such a crossroads it is equally important to take a step back to assess and accept where survival may be an unlikely outcome.
Diagnosing an end-of-life scenario
Many market disruptions appear obvious with hindsight – “tube” TVs and video cassette rentals to name but two, both impacted by relentless advances in technology. However, diagnosing such end-of-life scenarios in the moment is difficult.
Stakeholders may push for continuation, since they individually might have much to lose, but if business and market insight validates that a company is selling to a vanishing market or fundamentally failing to work as it did before, there will be value in taking tough decisions while there is still room to manoeuvre. The opportunity to exit these businesses and free up resources to focus efforts in such testing times on the core that will continue to create value for the future should not be underestimated.
Initial inclinations might be to sell these businesses and cut losses. However, it will only be successful if there are buyers – or “better owners” – who can generate additional value from these businesses. A distressed sale scenario will also do little to improve the chance of realising appropriate value.
In some jurisdictions, insolvency may provide another more straightforward route to explore. In others this is not an option, be it due to financial, legal or political constraints, reputational concerns or the overlapping nature of supplier and customer relationships. To complicate matters further, many businesses are not constructed as separate legal entities, which would allow for an easy separation from the ailing business.
Is the scene set for sunsetting?
Continuous restructuring efforts present perpetual challenges in stakeholder management, too. A drawn-out restructuring has never been well received by capital markets, banks or the public. Without a clear raison d’être for the business it is also difficult to retain key employees, preserve morale and ultimately keep customers and acquire more.
There is another route to consider – “sunsetting” the business.
While this approach still concludes with the ultimate removal of a business from a portfolio, it seeks to gradually and sustainably ramp-down operations in line with market decline. Accepting an inevitable decline in revenue and related implications allows for a structured continuation of the business with limited yet sufficient resources, while benefitting from a clear focus on the mission to wind down operations within a defined time period.
A combined values- and value-driven approach to sunsetting marries open, transparent communication and collaboration with stakeholders with the practical financial goals of maximising cash flow and reducing the fixed cost base in line with wind-down objectives. From an insolvency perspective, it avoids court proceedings and related fall-out and could be considered as solvent liquidation over time, preserving both shareholder and stakeholder value.
History has also shown dramatic market shifts that have resurrected and supercharged brands that may have been considered nearing-retirement (for example, Dr Martens footwear), so a controlled contraction of a problematic business unit now could still keep a role open for it to play in the future.
Value creation in disruptive times
Assuming the business to be sunset has been identified as part of a larger entity or ‘group’, the prerequisite for this transformation is an aligned business plan and a stringent carve-out, in order to ‘sunset’ the business as a standalone entity. Successful execution of this approach requires multiple areas to be carefully considered, ranging from workforce management and operational adaptations to establish honest maintenance-level capex and support balance sheet measures (e.g. asset sales), plus stakeholder management. For example, regarding workforce management, in many western countries a natural decline in internal capacities due to ageing populations could be leveraged in this scenario.
Businesses in decline very often free up significant working capital and thus the approach can become partially self-financing in many instances, although thorough preparation is key to creating value and outperforming other restructuring options. Well prepared, this approach can unleash energy and creativity at an unprecedented level, regarding the focus on the remaining future businesses as well as cash generation from the sunset business to invest in broader transformation efforts.
Although objections to sunsetting may include the negative effects on employee motivation, in these times of constant disruption, disruptive measures are required. In fact, open and transparent communication can serve to boost motivation as employees feel truly included and engaged in the process. Furthermore, when sunsetting can help to avoid insolvencies, the winners are not only the businesses but also the employees themselves.
Executed correctly, sunsetting may present a superior alternative to repeated restructuring or a potentially distressed sale of businesses. Moreover, when combining the values- and value-driven approach, sunsetting offers a shot at a rewarding transformative outcome to all shareholders and stakeholders at the other end of that initial moment of mature acknowledgment.
