Sellers often underestimate the magnitude of effort required to prepare carve-out financial statements.
Carve-out financial statements help present a clear and credible picture of the future stand- alone business. They help crystallize the buyer's understanding, build the value case for the business and accelerate a closing.
- Allocate adequate expertise to preparing carve-out financial statements
- Consider potential buyer requirements in determining the appropriate form of carve-out financial statements
- Invest the time upfront to prepare compliant, accurate, thorough carve-out financials statements
To carry out successful divestments, sellers must determine the value of the business or assets being sold and clearly communicate that value to potential buyers via financial statements.
Creating a carve-out or stand-alone financial statements is a complex exercise regardless of whether the carve-out represents the separation of a subsidiary, segment, division or other group of assets. This is particularly true when the business being sold does not align with the way the business was historically managed or reported.
Although carve-out financial statements are crucial to preserving deal value, sellers often fail to adequately plan for and prepare them, even in cases where audited financial statements are required due to SEC regulations, lender stipulations or other requirements.
Different forms of statements.
The form and requirements of carve-out financial statements vary depending on the type of transaction, and can range from unaudited deal-basis financial statements to SEC-compliant audited financial statements. In a transaction, especially one that will result in a public filing by a buyer who is a public registrant, financial statements must comply with SEC guidance.
Sellers often underestimate the magnitude of effort required to prepare carve-out financial statements. The SEC requires that carve-out financial statements represent the business as it was historically managed and reflect all the costs of doing business whether or not they were historically allocated (SAB 55). All carve-out-related adjustments — such as impairment or restructuring charges, purchase accounting adjustments and top- side entries — must be “pushed down.”
Other accounting complexities include, but are not limited to:
- Third-party debt and intercompany debt
- Related-party transactions
- Determining the capital structure for the carve-out entity
- Identifying the reporting segments for the carve-out and related impact on goodwill
Generating carve-out statements
Sellers’ accounting systems frequently lack the capabilities that allow for an easy carve-out. Much of the carve-out process requires manual data manipulation and, accordingly, it is important to be wary of tools purported to readily extract all requisite data. No two carve-outs are alike.
Rather than attempt to anticipate every possible issue that may arise, a better approach is to define a robust process using these guidelines:
- Identify and empower a carve-out project leader and team. The project leader’s role is to make decisions and keep the project on schedule. If knowledge of the transaction must be limited to a small number of people due to confidentiality, the project timeline is often extended, whether planned for or not. If the business includes operations abroad, it is leading practice to identify carve-out coordinators in each region or country in order to identify local issues in a timely fashion.
- Determine what kinds of statements are needed. Carve-out financial statements often need to be audited or made SEC-compliant based on the seller’s situation or the probable needs of anticipated buyers. In addition, regardless of the audit, stand-alone deal-basis financial statements are generally always a requirement.
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