What path will you navigate to carve out sale success?

By

Paul Hammes

EY Global Transaction Diligence and Divestiture Advisory Services Leader

Leader in transformational global divestitures. Catalyst for profitable growth. Innovator. Value driver. Passionate about diversity in business. Husband. Father.

4 minute read 30 Oct 2017

Selling a carve-out requires planning, effort and urgency. We provide a road map to get the deal signed in six months and closed in three.

Successful sellers understand that carving out a business is often more complex than acquiring one. Selling a carve-out requires a greater level of planning, effort and urgency. But, thinking like a buyer helps you control and expedite the process.

We outline the road map to getting the deal signed and closed, broken down by the key activities.

Part 1: getting the deal signed

Governance

  • A divestiture governance model could be established to help mitigate divestiture risks — it helps manage key deadlines, interdependencies, resource constraints, decision-making and stakeholder expectations.
  • An executive steering committee, functional separation leaders, and an internal and external communication strategy help define roles and responsibilities, and facilitate execution.

Tax

  • Determine which entities will be sold as stock versus assets, and calculate tax gain or loss
  • Consider a legal entity structure that can help maximize value to a buyer, and reduce tax on sale and repatriation of proceeds
  • Anticipate whether a tax provision for full financial statements will be needed

Carve-out financial statements

  • Define the perimeter of the business and identify components that may later be included or excluded
  • Consider financial statement alternatives (full, abbreviated or deal-basis and audit requirement)
  • Accumulate and aggregate data (financial reporting model)

Deal-basis information

  • Develop value story and tailored materials, and prepare for buyers
  • Compile deal-basis information and normalized earnings before interest, tax, depreciation and amortization (EBITDA), as buyers generally index purchase price on an EBITDA multiple
  • Develop forecast and value drivers — linking historical with projected results improves credibility

Operational separation

  • Define current-state operating model in order to avoid surprises that could decrease deal value or delay closing
  • Assess time required to establish new legal entities — requirements to establish new legal entities vary by jurisdiction and industry, and can take over a year to complete
  • Define the future operating model for the business and related separation strategy
  • Determine IT requirements to operationalize new legal entities, segregate access and data, address name changes, and enable separate financial reporting
  • Scale organization size and establish process to transfer employees
  • Define transitional service agreement (TSA) requirements and service delivery model in order to help buyers understand complexity and cost to operate on the first day, and to exit TSAs
  • Initiate separation planning and begin mobilizing resources — planning early can shorten this time frame and help reduce the need for TSAs

Part 2: sign to close

Congratulations, the deal is signed. Now, another phase of heavy-lifting begins. How do you successfully close your carve-out sale in only three months without eroding value or destroying the deal?

Once the carve-out sale agreement is signed, the focus shifts to separating the business from the parent company and transitioning to the buyer — without disrupting operations. We outline the road map to sign to close, broken down by the key activities.

Governance

  • Implement governance model
  • Determine the appropriate roles for DivestCo, seller and buyer
  • Implement day-one strategy and time line
  • Leverage technology-based tools
  • Address closing conditions

Tax

  • Address issues identified during buyer’s confirmatory tax diligence (as needed)
  • Identify, highlight and true-up tax attributes, and modify tax structuring as appropriate
  • Evaluate tax accounting impact of any internal structuring
  • Execute tax structuring, legal entity setup and asset transfers
  • Determine how to efficiently repatriate or redeploy cash
  • Calculate potential buyer tax liability and filings

Carve-out and deal-basis financials

  • Amend carve-out audited financial statements
  • Analyze balance sheet and plan for post-close activity to avoid surprises and delays
  • Monitor financial results and synergy realization versus forecast to avoid disputes or value loss
  • Provide appropriate level of financial documentation in data room 
  • Plan for closing and post-closing

Operational separation

  • Reconfirm current-state operations
  • Execute plan to operationalize new legal entities
  • Finalize day-one operating models to close the deal
  • Focus on the execution of a separation plan to shorten time to close and minimize work-arounds
  • Confirm TSA service delivery model
  • Align stranded cost mitigation with TSA exit planning
  • Assign high priority to closing out works council and union negotiations (as needed or where required)
  • Evaluate day-one readiness within 30 to 45 days of close to allow adequate time to change course

Summary

Successful sellers understand that carving out a business requires careful planning of complex, long lead-time activities.

About this article

By

Paul Hammes

EY Global Transaction Diligence and Divestiture Advisory Services Leader

Leader in transformational global divestitures. Catalyst for profitable growth. Innovator. Value driver. Passionate about diversity in business. Husband. Father.