Mastering the Modern Carve-Out

Updated: Apr 1, 2020

Make the most out of your carve-out transaction with deep due diligence.

A Winning Strategy

Carve-out deals can generate a lot of value when done right. When it comes to mapping out your carve-out process, its crucial to know how to avoid overpaying and when you’re about to get trapped under lots of unknown risk. For private equity investors, carve-outs provide an ideal solution for sellers looking to build their portfolios, release assets that no longer bring value, or pick up specific assets to improve returns and market share. Both sellers and buyers are faced the complexity and costs of a transition, and these fundamental challenges can prevent the deal from being delivered on its promise.

To avoid the many pitfalls of carve-outs, its crucial to understand these key components of a transaction:

Know the Business. Before undergoing any carve-out transaction, it is essential that the acquirer truly understands the full extent of the business, from the corporate shared services included in the transaction to any missing capabilities necessary for long-term success. Define what’s included in a deal from the start, and determine all operating model components, obtain detailed asset schedules, and conduct thorough due diligence to reveal any hidden costs or buried risks that could damage your long-term success.

Never Settle for Suboptimal Structures. It’s not enough to know the full scope of the financials without also considering the people, processes, and platforms needed. Unfortunately, buyers often hugely underestimate the cost of post-acquisition integration, thereby wasting their efforts during the integration stage. There may be various disturbances to operations that drastically impair work routines or system functionalities, so engage in meticulous diligence and in-depth planning to define gaps early on and prioritize long-lasting solutions.

Keep the Business Viable with Diligence. In some cases, important IT capabilities will stay with the parent company, some leadership roles will be empty, certain products are out of scope of the acquisition, or some legal entities and regulatory permits may not transfer. These are all operational components that can be addressed during the diligence process. The best acquirers will assess what processes create revenue and support operations and determine where there are gaps in products and services. Not to mention, comprehensive diligence will give you a clear look into the financials, so you can calculate deal valuation and synergies. With this visibility, acquirers can confidently identify the processes, platforms, and people that no longer support a streamlined business plan.

Stay Ahead of the TSA. Another common solution to facilitating a deal and easing the transfer of assets is to provide transition services or supply agreements. Take ownership of your transition services agreement (TSA) approach and conduct detailed analysis of costs and benchmarking in order to build reasonable timelines that allow you to effectively create, test, migrate, and manage new systems at TSA exit.

Leverage the Right Leadership. For buyers and sellers alike, effective leadership is vital to achieving a successful carve-out transaction. The buyer’s leadership is responsible for providing the initial insight and vision, communicating the strategy, and boosting employee morale. Buyers can rely on due diligence reports to ensure that leaders are ready to motivate and align employees during the integration. Similarly, sellers can evaluate the current leadership team and know as much as possible about the culture and to-be-divested entity. With this knowledge, the buyers and sellers will optimize the carve-out integration strategy framework.

Coordination is Key. Post-acquisition integration often comes with many variables. Once deal terms have been agreed, the most complex phase of the transaction begins: implementation. If you’ve dealt with various advisers, thousands of lines of data, and various forms of transitional service agreements, approvals, and contracts, it’s easy to get lost in all these moving parts. Given these challenges, planning, coordination, and project management will be the pillars of your carve-out success. Strong planning will help you anticipate potential risks and execute appropriate responses to any errors or misunderstandings.

Preserve and Maximize Deal Value. By creating the right outline and direction for your integration with deep due diligence services, the enterprise, system processes, and organizational culture will be tightly aligned and on the path to growth. Apply best-practices to each and every type of transaction, and over-emphasize the value of due diligence. These techniques will help you piece together a high-performing integration project with little to no stray areas.

Piecing Together the Perfect Carve-Out

By prioritizing the business and its structures with thorough due diligence, you can easily piece together the perfect carve-out with confidence. Once the essentials are in place, divesting assets of acquiring a carve-out business unit can be a sure-fire way to create value.

With this proven carve-out roadmap, you will quickly escalate value and increase deal certainty. Due diligence across the financials, operational aspects, and business will provide a sharp look into the transaction, from inception through completion, helping you improve your chances for success.