Carve-outs, i.e. the “carving out” of business units from a parent company, are not only reserved for listed groups. More and more medium-sized companies are recognizing the spin-off of parts of a company as an opportunity, among other things for strategy focusing, more efficient capital allocation or as a source of new capital. The motivations are diverse, and so are the options for structuring these transactions.

Carve-outs as a challenge

But carve-outs are not only a great opportunity, but also a challenge. In particular, when boundaries between parts of a company become blurred or even barely exist, a carve-out can be difficult. Interdependencies in the form of jointly used resources such as the IT infrastructure, human resources department or even real estate must be unraveled and plausibly evaluated for the M&A process.

Which areas are particularly problematic?

The case-specific hurdles of carve-out preparation largely depend on the industry and the business model of the company. The degree of self-sufficiency already present is also critical. Nevertheless, two areas can be identified for preparation that are regularly problematic and must be considered accordingly in a comprehensive manner.

In order to maintain the business activities of both entities, the Operational Hive-down is essential. This is intended to ensure that the operations of both the parent company and the spun-off business unit can continue smoothly after the transaction. The aim is to delineate or replace shared resources, service relationships between the business units and other overlaps in the value chain. Due to the involvement of all business units and the large number of issues, this process can be extremely complex. Extensive preparation, which in addition to the establishment of project management, includes both an isolated and contextual view of all functions, is essential for this.

This step is important for transparency

Far more important for the transaction itself is a separate profitability analysis of the business unit to be “carved out”. Particularly in the midmarket, there is often a lack of reliable reporting structures that enable financial separation. Thus, in the run-up to the divestment process, a financial structure must be established that assigns values to the interrelationships in line with the market and contributes to the plausibility of profitability. The goal must be to be able to present potential investors with well-founded financial data on which valuation models and ultimately the investment decision can be based. Taking this step professionally not only creates transparency, but is also elementary for building a basis of trust between the parties involved.

Then a carve-out makes sense

The central criterion in deciding for or against a carve-out should not be its complexity. Rather, entrepreneurs should ask themselves whether the business unit still has a lasting positive impact on the value of the company. So if the business unit and the parent company are more valuable as stand-alones than together, a carve-out may make sense.

Do you have any questions for our expert Sven-Roger von Schilling, or would you like more in-depth advice? Then contact us directly now.

In an nutshell:

ToDo

– Set up project management

– Isolated as well as contextual consideration of all functions

– Setting up a separate financial structure

– Plausibility check of the profitability of the business unit to be divested

NoGo

– Insufficient financial consideration

– Too little planning and underestimation of operating expenses