Carve-out

A carve-out is the separation of a business unit from a larger corporate group, which is then sold. The separated unit is made legally and operationally independent. Corporates use carve-outs to divest non-core businesses and focus on their core operations.

The difficulty is that such a unit often lacks complete separate accounting and infrastructure: human resources, accounting, procurement, IT systems, insurance and customer contracts sit wholly or partly with the parent. Carve-out financial statements are therefore prepared first, presenting the unit's earnings and assets as if it had operated independently, supplemented by a separate analysis of the costs it would actually incur on a stand-alone basis. Those stand-alone costs may differ materially from the previous internal allocation, and the difference is one of the most frequent points of dispute in price negotiations. Dis-synergies are added, such as worse purchasing terms without group volume. The separation requires a clear definition of the assets, contracts, employees and liabilities included in the sale. The transfer structure determines which consents and individual steps are needed.

For the transition period transitional services agreements are concluded under which the seller continues to provide certain functions for a limited time and for a fee, often over several quarters. Carve-outs appeal to financial sponsors, because neglected non-core units offer improvement potential and complexity can create additional opportunities. Preparation effort and completion risk are correspondingly high. Separating the workforce is a workstream of its own, because alongside clearly attributable employees, shared functions in administration, IT and procurement are affected and applicable employee consultation and co-determination rights must be considered in their allocation. Brand and licensing questions also need early clarification, since the separated unit often trades under a group brand that is not sold with it. A transitional licence with a rebranding period may therefore be required. Both materially affect the timetable and cost of separation.