16 June 2020

“Let it go”: The search for painless carve-outs

Jonathan Aiken, CFA, Ruari Sinclair

BDA Partners has a long track record of completing complex cross-border carve-outs. As one of the most active M&A advisors in Asia, we complete several carve-outs for clients each year. We share our insights below on how to complete a cross border M&A carve-out transaction successfully.


Carve-outs are a growing feature in the current M&A deal market for multi-national corporations (“MNCs”) and financial sponsor-backed companies, particularly as CEOs and shareholders assess non-core segments and assets and look to improve financial return metrics.

Acquiring a carved-out business is attractive. Significant value can often be created through margin improvements and revenue / cost / operational synergies with the new owner. Carve-out transactions require buyers who are experienced with reviewing, diligencing and identifying the value-add opportunities, and have an experienced investment team to implement changes from day one. These criteria make financial sponsors ideal acquirers of carved-out businesses. The growth in dry powder with private equity funds, estimated at US$830 billion for buyout funds at December 2019[1], is increasing deal volumes and competition between private equity funds searching for acquisitions to put committed equity to work. This in turn is having a positive impact on the valuations MNCs can realise.

During the current COVID-19 pandemic, we see management teams and shareholders using this time to identify any non-core segments and assets which could be carved out in the future; either to raise cash to improve liquidity; or as part of a wider restructuring of the Group. If the potential carve-out is not urgent due to a distressed financial position, this time during the COVID-19 pandemic is being used to assess and plan for future carve-out transactions when local and global economies begin to recover.

Carve-outs are not for the faint of heart. They present the seller with a range of complex, time consuming and potentially challenging deal hurdles from day one.  Deal complexity arises from company business operations including international subsidiaries, logistics, procurement, HR, back office functions and IT systems, resulting in an array of deal challenges. No carve-out deal is the same, which means customised solutions will be needed to bridge the needs of the buyer and seller of each deal. Early preparation with an experienced financial advisor is critical in order to avoid potential pitfalls.

Being poorly prepared for a carve-out can have a major impact on the chances for success. Poor preparation or neglect of key areas may jeopardise the transaction itself, and will certainly:

  • Increase scope and time of buyer due diligence
  • Lead to value mismatch between the shareholders and the buyer
  • Damage potential post deal synergies
  • Impair post transaction relationship with the seller where Transitional Service Agreements (“TSAs”) are required

We believe there are a number of common themes and actions which can be considered to help address these risks and challenges of completing a carve-out transaction, and ultimately increase the likelihood of successfully completing the transaction.


Appoint experienced external advisors as early as possible

Areas of deep complexity and risk include standalone financials, legal risk and integration planning / implementation with the new owner, employee transfer and shared IT/compliance. In advance of a process we recommend appointing a financial advisor and other sell-side advisors to help manage the process in a disciplined approach. This would include a Big 4 accountancy firm and a legal firm as a bare minimum, but IT and HR advisors may also be needed. Advisors who have past experience in carve-outs will help maximise value and provide confidence to buyers about the carved-out business they want to acquire.


Identify the carve-out business senior management team early

The senior management team of the carve-out business needs to be identified and aligned with the carve-out transaction and strategy early in the process. The potential buyers will need to meet and hear the management team discuss the business early in the process and give the buyer confidence about the carved-out business they are looking to acquire, including the short-to-medium term strategy and growth opportunities.

To ensure the management team are aligned and motivated, the seller should ensure there are transaction and retention bonuses in place as part of the sale process. This will motivate the senior management team to get the deal done, but also provide confidence to the buyer they will inherit a senior management team that knows the business inside out and will drive the integration and growth plans from day one.

To the extent there are full time employee (“FTE”) gaps in the senior management team being carved-out, it is best to be upfront and communicate this early in the process to the buyer, so they are aware the positions which need to be filled on day one. However, the costs for such unstaffed positions, should always be included in the historical and forecast financials.

Finally, if needed, the seller should bring in dedicated cross departmental support as part of the sale process to help buyers understand a particular area if not covered by the senior management team. For example, the seller may have a Group Head of IT who is not transferring with the carve-out transaction, but they will be important for educating the potential buyers on the IT framework / systems in place.


Prepare a “what’s in, what’s out” analysis

Early in the sale process, the seller along with external advisors should prepare a detailed “what’s in, what’s out” analysis setting out all the assets including real estate, contracts, back office / IT services and people by entity / location that will be included in the transaction perimeter. This exercise is fundamental to complete early in the sale process as it will dictate how you approach preparations of the historical / forecast financials and how you sell the equity story to potential buyers as you take the carved-out business to market. If this analysis is detailed, thorough and well thought through, it will give buyers confidence about the business they want to acquire. This analysis will help identify any services such as IT, finance, procurement, contracting, etc. that might need to be covered by a TSA on day one.


Prepare the standalone financials

Once the “what’s in, what’s out” analysis is completed, the preparation of the financials will be somewhat easier. To the extent possible, the financials should be prepared and presented with the buyer and its due diligence in mind. For example, the financials should be split by key segment, geography and even a customer / products / services / SKU level, if possible.

You should ensure that the carved-out financials have all the costs required to run the business on a standalone basis from day one, post carve-out. For example, if a sales or finance person previously spent 50% of their time working for both the carved-out business and the parent group, then you should include the costs for one full FTE and not a half FTE in the carved-out financials. This will be a key focus of due diligence for a buyer, so it is important standalone costs are detailed and well thought through.

In the current COVID-19 environment, forecasting the financial performance of the carved-out business will be inherently challenging and difficult to set out accurate and reliable assumptions. Time should be taken to assess the impact of financial forecasting under COVID-19, and if needed, you should delay the process until the financial forecasts can be modelled accurately with solid underlying assumptions, and when the local / global economies have stabilised.

In our experience, the carve-out financials and operating model are certainly the areas where clients believe there would be significant room for improvement if they could start the sale process again.

While this may appear straightforward, accumulated habit and internal company shared resources may give a false impression of true standalone costs and requirements. Deep review and analysis are required to verify the completeness and accuracy of the standalone accounts.


Prepare the equity value add story for a new owner

There will be a fundamental reason why the MNC or private equity fund wants to divest the carve-out business, and this could include being a non-core business, lack of senior management focus, lack of investment, better management of asset portfolio, or struggling financial performance in the face of market competition. It is critical to tell the equity story to the buyers as to why it is a great business to own and how under the right owners, the business has great growth opportunities and can create significant value for the new owner. This could be achieved through investments in new plant & equipment, geographical growth, product development, or from positive market forecasts. If required, consider engaging commercial due diligence providers to prepare a report to help tell the market story.


Legal, tax and jurisdiction complexities

The legal aspects of a carve-out transaction tend to be one of the more complicated areas. This is largely associated with how to separate the in-scope legal entities (or assets) from the wider Group, along with how to legally separate customer & supplier contracts, IP, fixed assets and employment contracts. Critical assets or employees may fall out of the perimeter of the carve-out and may need to be re-assigned to the carved-out entity before or on closing. There may also be change of control clauses in customer, supplier or lender contracts which need to be communicated. Furthermore, there may also be tax implications for the seller or the carved-out business from the carve-out, and if so, internal or external tax advisors should be consulted.

As the business is being carved-out from a wider Group, it is likely there could be legacy issues or provisions from the prior owner or day-to-day operations, such as legal or environmental provisions. Assessing these legacy issues early in the process can help to prevent further value erosion from material debt-like items.

For a successful outcome of the transaction, to preserve value and provide protection to the seller, it is crucial that the Sale and Purchase Agreement (“SPA”) is prepared early and sufficient time is provided for sell-side and buy-side lawyers, consultants, and investment professionals to negotiate and share the mark-ups back and forth. Furthermore, schedules to the SPA should be added which set out the assets, customer & supplier contracts, and IP for example, that will be included in the transaction perimeter.

Finally, it is crucial to have the TSA designed, planned and fully costed for immediate implementation. Drafting should begin early, with a draft TSA in the dataroom, as part of the buyer’s due diligence will be understanding how quickly and challenging the separation transition period will be, and what the associated costs, penalties, services provided, and performance reporting are. There will be significant additional one-time start up transitionary costs to be borne by the buyer and seller in preparation and implementation of the TSA.

Despite rigorous preparation for a corporate carve-out, flexibility is needed by both buyer and seller to arrive at an agreement. TSAs may include sharing of commercially sensitive information, IT infrastructure, expose the seller’s customers to a new party in the form of a buyer, and lead to potential legal ramifications if handled poorly. A well-designed and managed process will build trust which is the essential ingredient to achieve agreement.


If you would like to discuss carve-outs further, or if you are considering a carve-out transaction, please reach out to any of the BDA Partners team members listed below.

Jonathan Aiken, Managing Director, London: jaiken@bdapartners.com

Ruari Sinclair, Vice President, London: rsinclair@bdapartners.com




[1] Bain Global Private Equity Report 2020