Why divestment is sexier than investment

From Creation to Capital Discipline.

Working with startups is always about creation: new products, new markets, new teams.

I spend a lot of time with founders exactly at this stage - where growth energy is at its peak.

At the same time, I also worked with shareholders of mature businesses. And this experience led me to an important insight: “growth and value creation are not the same thing.” Capital discipline becomes critical precisely when the business has already “survived.” And at this stage, an uncomfortable question appears: “who is feeding whom - the business the owner, or the owner the business?”

In my practice, owners often financed loss-making assets for years not because they didn’t see the numbers, but because they saw the story. So much had already been invested that it felt painful to walk away. “This was our first business.” “We survived a crisis together.” “We’ve been through so much.”

These businesses turn into suitcases without handles: hard to carry, painful to drop - and somewhere deep inside lives the hope that a handle will eventually grow.

Making a radical decision is easier when EBITDA is consistently negative. Everything is obvious then. Much harder is the case when EBITDA is positive. The business looks “alive,” “operational,” “almost there.” And this is where the key question appears - one owners almost never ask themselves: “Does this business actually create value for the shareholder, after the cost of capital?”

Positive EBITDA does not mean the business earns money for its owner. If returns are below the cost of capital, the shareholder is effectively subsidizing the business with their own money - just in a more polite form.

Because capital has a price.

How do you check this?

If return on invested capital (ROIC) is below the required return of the owners (WACC), you are destroying value.

A quick stress test:

• ROIC > WACC   -  value creation

• ROIC = WACC   -  running to stand still

• ROIC < WACC   -  value destruction

  
  

This is where divestment becomes a sign of strength, not weakness. Sometimes the smartest growth strategy is an exit.

Typical divestment candidates:

- ROIC below WACC for 2–3 consecutive years

- high managerial complexity with low cash flow

- a “founder’s favorite” subsidized by other businesses

- businesses with structurally limited return potential

One owner I worked with had a new, seemingly promising asset in her portfolio  -  a high-tech production plant. Expectations were high, the product was trendy, the story was compelling. But the market turned out to be low-margin, and the plant had to be constantly subsidized by other assets. She was not a dreamer. She exited the business relatively quickly and refocused on higher-return assets. The group’s return on capital increased.

To decide whether a business is worth keeping, I often suggest asking five simple questions:

- What has this business’s ROIC been over the past three years?

- What is the group’s WACC?

- Does the business create EVA (economic value added)?

- Is there a real strategic or synergy effect?

- Would I buy this business today for this price?

If the answer is “no” to 2–3 of them -  this is no longer an investment.

It’s attachment.