Unlike a conventional 100-day M&A integration programme, there are specific considerations to keep in mind if you intend to perform a business carve-out, i.e. when selling a specific division or profit center of your organization. There are various reasons why companies might decide to carve out a particular business unit and sell it on: there could be a wider change to corporate strategy, it could be underperforming, market conditions may have shifted, or the organization could simply wish to double down and focus on their core business function. Within this article, we are going to offer some tips for sellers in order to make your carve-out project as smooth as possible and mitigate risks along the way.
The first step to orchestrating a successful carve-out is to be very clear and precise about what is or isn’t included within the deal. It is vital to determine the exact components that you will sell off to your buyer, as well as what you require to continue driving your primary operating model seamlessly after you have sold off a division within your existing structure. Consider how to structure service provision, how to calculate payments for new services, as well as how your pricing will be affected by a reduction in services (which can sometimes make the cost of performing your services more expensive). Be very detailed and specific in your approach to prevent challenges and lack of clarity arising further down the line.
When performing a carve-out of a specific business unit or product line from your wider corporate parent, you will need to dis-integrate established processes, systems and data from the parent in order to sell it off. This will likely require a TSA (Transition Services Agreement): a contractual agreement between a buyer and seller, in which the seller will contract out its services and expertise to the buyer for a specified time period. As implied within the name, the purpose of the TSA is to support this transition phase, facilitating the transition of ownership from your company to your buyer. This will give your buyer time to adjust to newly acquired systems and infrastructure, and build out its own departments of services that are being temporarily provided by the seller. TSAs form the building blocks of your carve-out, working as powerful tools for buyers to strengthen their position within their industry. These typically last for a period of 6, 12 or 18 months, depending on the circumstances of your deal, so ensure you negotiate a suitable timeline with your buyer that meets both of your needs.
Once your TSA is in place, take some time to consider more detailed specifics around which services you will extend to your buyer during that period (for example, accounting and HR platforms, billing and invoicing systems, etc). It will be important for your buyer to decide which business elements should be inherited from your organization during the transition, versus which should be developed internally from their side. As always, pay particularly close attention to organizational design (how your team structure and leadership will be affected by the carve-out, as well as how this will change following the termination of the TSA period), as well as ensuring your reorganization design minimizes legal risk (e.g. how the sale of your business unit will affect corporate structure/tax, winding down associated accounts/registers). It is essential to designate key operational and strategic decision makers on both sides of the businesses, across each relevant function. The most successful carve-outs and separation projects are executed when all decisions are carefully thought through.
Finally, integrate! Although carve-outs may require unique logistical considerations throughout the early-stage due diligence phases regarding how the business unit will be spun-out, the subsequent integration process is fundamentally very similar to typical M&A integrations. Utilize integration best practices, prioritize your objectives and communicate clearly with your staff: the same change management principles will apply (read more about these on our blog). The combination of all of these factors should make for a smooth transition.
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