What Is a Divestiture — and When Does It Make Sense?
Not every business decision is about growth. Sometimes the smartest move a business owner can make is to sell off part of their company — a process known as a divestiture. Whether you’re shedding an underperforming division, raising capital for your core operations, or simplifying your business structure, divestitures are a powerful strategic tool that too few small and mid-sized business owners consider.
A divestiture is the partial or full disposal of a business unit, subsidiary, product line, or asset. Unlike selling your entire company, a divestiture lets you retain ownership of your core business while monetizing a piece of it. Think of it as strategic pruning — cutting away branches so the tree can grow stronger.
Divestitures happen at every level of business, from Fortune 500 companies spinning off divisions to a local restaurant group selling one of its three locations. If you own multiple business units, product lines, or locations, divestiture is a tool you should understand.
Top Reasons Business Owners Choose to Divest
There’s no single reason to sell part of your business. Here are the most common drivers:
1. Refocus on Your Core Business
Over time, many businesses expand into areas that pull management attention and resources away from what they do best. Divesting a non-core unit lets you:
- Concentrate leadership time and energy on your strongest revenue drivers
- Reduce operational complexity and overhead
- Sharpen your competitive advantage in your primary market
- Eliminate distractions that dilute your brand or value proposition
If you find yourself spending 40% of your time on a division that generates 15% of your revenue, that’s a strong signal to consider divestiture.
2. Raise Capital Without Taking on Debt
Selling a business unit generates immediate cash without the burden of loan payments, interest, or covenants. This capital can be used to:
- Fund expansion of your core business
- Invest in new equipment, technology, or talent
- Pay down existing debt to strengthen your balance sheet
- Build a cash reserve for future opportunities or economic downturns
For business owners who are overleveraged or capital-constrained, a divestiture can be a lifeline that funds growth without adding financial risk.
3. Regulatory or Compliance Requirements
In some industries, regulatory changes or antitrust concerns can force a divestiture. If a merger or acquisition triggers market concentration issues, regulators may require you to sell off certain operations. Even without formal requirements, proactively divesting in a changing regulatory environment can reduce compliance costs and legal exposure.
4. Underperformance or Strategic Misalignment
Not every acquisition or expansion works out. If a division is consistently underperforming, losing money, or no longer aligned with your strategic vision, selling it — even at a modest price — may be better than continuing to subsidize losses. The buyer may have the expertise, resources, or market position to make that unit thrive in ways you can’t.
5. Succession and Estate Planning
Business owners approaching retirement may divest certain units to simplify their holdings, reduce the complexity of succession planning, or create liquidity for estate purposes. Selling a division now can make the eventual transition of your remaining business smoother and more manageable for your successors.
How to Value a Business Unit for Sale
Valuing a division or business unit is more complex than valuing a standalone company. Here’s why — and how to approach it:
The Challenge of Carve-Out Valuation
When a business unit operates within a larger company, its financials are often intertwined with the parent. Shared overhead, intercompany transactions, and allocated costs make it difficult to determine the unit’s true standalone profitability. Before you can value the unit, you need to create standalone financial statements that reflect:
- Direct revenue attributable to the unit
- Direct costs of goods sold and operating expenses
- A reasonable allocation of shared costs (rent, insurance, admin staff, IT)
- Any intercompany transactions that would need to be replaced at market rates
- Capital expenditures specific to the unit
Common Valuation Methods
Once you have clean standalone financials, the most common valuation approaches include:
- Multiple of Seller’s Discretionary Earnings (SDE): For smaller units (under $1M in earnings), buyers typically pay 2x–4x SDE, depending on the industry, growth trajectory, and risk profile.
- Multiple of EBITDA: For larger units, EBITDA multiples of 3x–6x are common in the lower middle market. Premium businesses with strong recurring revenue, defensible market positions, or high growth may command higher multiples.
- Asset-Based Valuation: If the unit’s value is primarily in its tangible assets (equipment, inventory, real estate), an asset-based approach may be appropriate. This is common for manufacturing, distribution, or asset-heavy service businesses.
- Discounted Cash Flow (DCF): For units with predictable, growing cash flows, a DCF analysis projects future earnings and discounts them to present value. This method is more common in larger transactions.
Getting a Professional Valuation
Don’t guess. Hire a qualified business appraiser or M&A advisor to perform a formal valuation. They’ll identify value drivers, normalize financials, and benchmark your unit against comparable transactions. A professional valuation also gives you credibility with buyers and lenders — which matters significantly when the buyer is financing the purchase.
Finding Buyers for Your Division
The buyer pool for a business unit is different from that of a standalone company. Here’s where to look:
Strategic Buyers
These are companies in your industry or an adjacent industry that would benefit from acquiring your unit. Strategic buyers often pay premium prices because they can realize synergies — cost savings, cross-selling opportunities, or market expansion — that make the unit worth more to them than to a financial buyer.
- Competitors looking to gain market share or enter your geography
- Suppliers or customers seeking vertical integration
- Companies in adjacent markets looking to diversify
Financial Buyers
Private equity firms, search funds, and individual acquirers (often called “entrepreneurial buyers”) look for profitable business units they can operate independently. These buyers focus on cash flow, growth potential, and operational independence.
Management Buyouts (MBOs)
Don’t overlook your own team. The managers running the division may be ideal buyers — they know the business, the customers, and the operations. An MBO can provide continuity for employees and customers while giving you a clean exit from that unit.
Using a Broker or M&A Advisor
For most divestitures, working with a business broker or M&A advisor is strongly recommended. They’ll help you:
- Prepare a confidential information memorandum (CIM)
- Identify and screen potential buyers
- Manage the process while you continue running the business
- Negotiate deal terms and structure
- Coordinate with attorneys, accountants, and lenders through closing
Making Your Division More Sellable with SBA Financing
Here’s something most sellers don’t think about: the easier it is for a buyer to finance the purchase of your unit, the more sellable it becomes — and the higher the price you’re likely to get.
SBA loans are the most common financing tool for small business acquisitions in the United States. The SBA 7(a) loan program allows buyers to acquire businesses with as little as 10% down, with loan amounts up to $5 million and repayment terms up to 10 years. This dramatically expands the pool of qualified buyers for your division.
Why SBA Financing Matters to Sellers
- Larger buyer pool: More buyers can afford your unit when they only need 10% down instead of 30%–50%.
- Higher purchase prices: When buyers have access to favorable financing terms, they can afford to pay more.
- Faster closings: Experienced SBA lenders can close acquisitions in 45–60 days, keeping your deal on track.
- Reduced seller financing: With SBA funding covering up to 90% of the purchase price, you’re less likely to be asked to carry a note — meaning you get more cash at closing.
How to Position Your Unit for SBA Buyers
To attract SBA-financed buyers, make sure your division meets key SBA eligibility criteria:
- Clean financial records: At least 2–3 years of tax returns and financial statements showing consistent profitability.
- Transferable operations: The business should be able to operate independently of the parent company post-sale.
- Reasonable valuation: SBA lenders scrutinize valuations carefully. A business priced at a reasonable multiple of cash flow is far more likely to get approved.
- Seller transition support: Most SBA lenders require the seller to provide 2–4 weeks of transition training. Being willing to support the buyer post-sale makes your deal more attractive.
Structuring the Divestiture Deal
The structure of your divestiture affects everything — taxes, liability, transition complexity, and the buyer’s ability to secure financing. Key structural decisions include:
Asset Sale vs. Entity Sale
- Asset sale: The buyer purchases specific assets (equipment, inventory, customer contracts, intellectual property) rather than the legal entity. This is the most common structure for small business divestitures and is strongly preferred by SBA lenders.
- Entity sale: The buyer purchases the stock or membership interests of the subsidiary or division entity. This transfers the entity — including all assets and liabilities — to the buyer. Less common for small deals due to liability concerns.
Key Deal Terms to Negotiate
- Purchase price and payment terms: All-cash at closing, seller financing, earnouts, or a combination.
- Non-compete agreement: Buyers will almost always require you (and possibly key managers) to sign a non-compete to protect the value of what they’re buying.
- Transition services agreement: If the divested unit currently relies on shared services (IT, HR, accounting), you may need to provide those services for a transitional period post-closing.
- Employee matters: Will employees transfer to the buyer? What happens to benefits, accrued PTO, and employment agreements?
- Customer and vendor contracts: Assignment of contracts requires consent from the other party. Start this process early.
The Divestiture Process: Step by Step
A well-executed divestiture typically follows this timeline:
- Months 1–2: Strategic assessment, decision to divest, selection of advisors (M&A advisor, attorney, accountant).
- Months 2–3: Financial preparation — carve-out financials, valuation, preparation of marketing materials.
- Months 3–5: Go to market — identify and contact potential buyers, manage inquiries, execute NDAs, share information.
- Months 5–6: Negotiate LOI, enter exclusivity, buyer conducts due diligence.
- Months 6–8: Finalize deal documents, secure financing (if applicable), obtain necessary consents and approvals.
- Month 8: Closing and transition.
The entire process typically takes 6–12 months from decision to close, depending on complexity, buyer readiness, and market conditions.
Common Mistakes Sellers Make in Divestitures
Avoid these pitfalls that can derail your divestiture or leave money on the table:
- Waiting too long: The best time to sell is when the unit is performing well, not when it’s in decline. Buyers pay for momentum.
- Poor financial preparation: Messy books, comingled finances, and lack of standalone statements will scare off serious buyers and kill SBA financing.
- Neglecting the unit during the sale process: If performance declines while you’re marketing the business, buyers will renegotiate or walk away.
- Underestimating transition complexity: Separating shared systems, contracts, and employees takes time and planning. Start early.
- Not considering tax implications: The structure of the sale has significant tax consequences. Work with a tax advisor before you sign an LOI.
- Being unrealistic about price: Emotional attachment often leads sellers to overprice. Let the market and comparable transactions guide your expectations.
How GoSBA Helps — Even When You’re the Seller
At GoSBA, we work with buyers every day who are acquiring businesses through SBA financing. But our expertise benefits sellers too. When your buyer works with GoSBA to secure SBA financing, you benefit from:
- A network of 50+ SBA lenders competing to fund the deal — increasing the likelihood of approval and a smooth closing.
- Over $320 million in SBA loans funded in 2025 — we know what lenders look for and how to package deals for approval.
- Free service for the buyer: GoSBA’s loan brokerage services cost the buyer nothing, removing a barrier to getting your deal financed.
- Free business plan and financial projections (a $2,500–$5,000 value): We prepare the buyer’s SBA-required business plan at no cost, which accelerates the lending process.
- Deal expertise: We’ve seen hundreds of small business acquisitions. We can help identify potential issues early and keep the transaction on track.
If you’re considering divesting a business unit — or if you’ve already found a buyer who needs financing — we can help make the deal happen.
Ready to Make Your Business Unit More Sellable?
Whether you’re just exploring the idea of a divestiture or you’re ready to go to market, the financing piece matters more than most sellers realize. A buyer who can secure SBA financing quickly and reliably is a buyer who closes.
Contact GoSBA today for a free consultation. We’ll help you understand how SBA financing can expand your buyer pool, increase your sale price, and get you to closing faster.
