Having been involved in every type of a carve out transaction, it is clear to me that while there are only two ‘types’ – a buy side and sell side – it’s true to say that there are multiple perspectives. I’ve worked for the seller, supporting it to design and implement a carve out. I’ve performed Separation focussed Vendor Due Diligence. I’ve worked for the buyer to diligence the sellers carve out plans. I’ve supported the buyer to develop the carve out plans from the buy side, where the seller hasn’t developed the carve out view in any real detail. I’ve supported the management team sat in the middle – a role often overlooked – where it is caught between loyalties to its existing employer and the desire to impress a potential new owner. It can be an emotional rollercoaster.

To me, a carve out or separation programme is about addressing everything – different to the integration programmes I support which are all about choice – what to integrate and when. On a separation, there is usually a fixed timeline to work to and it needs to be a robust exercise to give both the seller and buyer confidence in the deal.

So, what do buyers and sellers need to think about? Firstly, don’t go into any separation thinking it’s just a cost exercise. A separation programme is about protecting value, and there are inherent cost implications to that, but any separation starts with a true understanding of how the business operates today and all the interdependencies between the Group and the carve out business. If the seller management team only consider the separation from a Group recharges perspective, they will miss the nuances of how a business operates in practice – those interdependencies that a finance system fails to capture.

The initial separation planning meeting is always an interesting one. There is often a moment of dawning realisation where the carve out business understands the true impact of the separation. Issues such as how the logistics and supply chain will work independently, where stock/parts are stored if a single site is carved into two, how employees will access the canteen, not to mention the hours spent on issues like employee car parking.

If the seller gets both the Group management team and carve out business team together and work through function by function where the interdependencies exist, they are then ready to consider the solutions. Transitional Service Agreements (“TSAs”) are the day one sticking plaster of choice for many deals. They offer both parties additional time. It enables the buyer to work out what the end state will look like within their own organisation and put in place the steps required to get there – recruitment for roles previously performed by Group, implementation of new systems, to find and move into a new office. There is benefit to the seller too. Once their corporate recharges cease, the seller is left with stranded costs which it either needs to charge out to its remaining business units or restructure to be more efficient. TSAs allow the seller more time to consider their stranded costs and how to mitigate them once the TSAs end.

So, what should the seller be addressing in their separation plans? What should you expect to see as the buyer of a carve out? Here are my key considerations for both parties:

1. Robust evidence of separation planning
The starting point for the seller should be to identify all the interdependencies between the Group and the business being carved out. The best approach for this is to sit with Group and the carve out business management teams and go function by function to discuss all the interdependencies and capture them. Once these are articulated, solutions will need to be identified for Day One and the fully separated end state. The seller should be clear on all assumptions made and then the buyer can assess what it needs and what it doesn’t. Only telling half the story to a buyer is confusing and can incur additional time and costs in getting the deal done.

2. People
The seller should work through the “As Is” organisational structure and set out, by function, and identify which roles are fully dedicated to the carve out business today. It should identify any Group roles which are effectively dedicated to the deal perimeter and will transfer into the perimeter on or before Day One, setting out clear criteria for how those roles have been selected. The final stage is to work out which gaps exist to be filled by a buyer (recruitment or from within buyers existing organisation). When these people assumptions and headcount information are set out clearly at the start of the deal, it really helps a buyer get comfortable with the deal perimeter.

3. Cost adjustments (recurring and one-off)
Once the seller has identified all the interdependencies and the people perimeter, the next step is to look at how these flow into the P&L. The starting point will be to strip out existing recharges and then build up a view of the replacement costs for services and support provided by Group. The seller should clearly articulate all assumptions made and the basis for the replacement costs. The seller should also be clear on the one-off costs to implement the separation which can be significant, particularly when IT is involved – don’t just think about the recurring cost adjustments. The buyer is then able to assess exactly what they are getting and what the business will look like within their own organisation.

4. TSAs
Sellers should provide buyers with a clear view of the proposed TSA services early in the deal discussions, including the proposed duration for each TSA and costs. A seller normally plans for shorter duration TSAs to minimise distraction to its own business. Buyers may need a longer TSAs to ensure a smooth transition into its own organisation. A buyer needs to work out what it needs to do to establish the carve out business as standalone (e.g. implement a new ERP system) or integrate into its own business and then how long that activity will take. This will inform the negotiations on TSA terms.

5. Right-sizing
Sellers will often play down the level of possible dis-synergies and present a cost neutral position once the business is carved out from the Group. The buyer should seek to really understand what the seller is presenting and work out whether their assumptions hold true once the business is integrated into the buyer’s organisation. Focus on economies of scale that may no longer be accessible outside of the seller’s organisation. In addition, consider whether the sellers separation plan seeks to replicate the existing Group structures/operating models which may be too heavy for a standalone business and would present an opportunity to right-size for the buyer.

In summary, there are many considerations to assessing a carve out on both the buy and sell side of the transaction. For the seller, I recommend an initial carve out workshop early in the process to quickly identify the major interdependencies and kick start your sell side separation planning. On the buy side, the first carve out workshop with the seller is critical to getting a common understanding of the complexities and any separation red flags to focus on.

Cortus Advisory Group’s senior team is highly experienced in supporting clients to successfully buy and sell businesses – from identifying strategic opportunities, to developing the sell side separation plans ahead of a process, to guiding them through the acquisition process (including due diligence and buy side separation planning) right through to identifying synergies and executing an integration post deal.

To find out more about how we can support you, please contact Lizzie Meadowcroft at lmeadowcroft@cortusadvisory.co.uk