What path will you navigate to carve-out sale success?

1. Determine which entities will be sold as stock vs. assets and calculate tax gain or loss.

• An anticipated tax bill may drive a “go or no-go” decision and help focus on how to maximize after-tax proceeds.
• Stock versus assets structure affects tax indemnities, after-tax proceeds and the buyer’s ability to fund debt repayment, distributions to shareholders or other business needs.

2. Consider a legal entity structure that can help maximize value to a buyer and reduce tax on sale and repatriation of proceeds. Strategies that appropriately reduce future cash taxes and effective tax rate may increase valuation.

3. Anticipate whether a tax provision for full financial statements will be needed. A tax provision is required for audited carve-out financial statements; however, it is not required for abbreviated financial statements.

1. Define perimeter of the business and how it might be packaged (e.g., sale as a whole or split and offered to multiple buyers) and identify components that may later be included or excluded. This affects all other carve-out work streams.

2. Consider financial statement alternatives (full, abbreviated or deal-basis and audit requirement). 

• Audited financials require significant effort from corporate and field personnel, along with knowledge of carve-out accounting rules.
• Providing only unaudited deal-basis financials may affect the buyer pool and valuation (e.g., if the buyer needs audited financials for financing purposes or regulatory purposes).

3. Accumulate and aggregate data (financial reporting model). 

• Sellers should use a model to aggregate data and post adjustments to prepare carve-out financial statements.
• A trail of historical data and carve-out adjustments facilitates the audit, diligence and reporting of discontinued operations (if applicable).

4. Identify shared and corporate costs and bridge historical to stand-alone cost estimates. 

• Direct and indirect costs must be reflected in historical carve-out financials; deal terms do not dictate accounting treatment.
• Allocations in carve-out financials are different from those in deal-basis financials; insufficient preparation can lead to delays.

1. Develop a value story and tailored materials, and prepare for buyers.

• Value story linking historical and forecasted operating results, and market assessment, supports consistent messaging and facilitates speed to sign.
• Management preparedness instills buyer confidence and helps control the discussion of the business being sold.
• A comprehensive and self-service data room reduces interactions with buyer advisors and provides time to manage the business and discuss the salient issues with the buyer.

2. Compile deal-basis information and normalized EBITDA. Buyers generally index purchase price on an EBITDA multiple.

3. Develop forecast and value drivers. Linking historical with projected results improves credibility.

4. Develop a view of stand-alone and one-time costs. 

• Buyers can make better-informed decisions when they understand a company’s operating model, potential synergies and stand-alone costs.
• Sellers can also protect or enhance value by controlling buyer assumptions.

5. Prepare sell-side diligence report. During a complex auction process, a well-prepared and comprehensive seller diligence report may help enhance competition and expedite buyer diligence.

1. Define current-state operating model. Understanding current operations helps avoid surprises that could decrease deal value or delay closing.

2. 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.
• Failure to act expediently can delay establishing bank accounts, contracting with vendors, configuring systems, establishing processes, selling product and other downstream activities, and can delay (or stagger) closing.

3. Define the future operating model for the business and related separation strategy.

• An optimized future operating model can enhance deal value.
• A credible separation strategy shows buyers that the business can be separated without loss of value.
• Develop a disposition strategy for non-”Project M.” in-flight projects.

4. Determine IT requirements to operationalize new legal entities, segregate access and data, address name changes and enable separate financial reporting. IT is often the most entangled functional area and the one that requires the most lead time and it is typically the most expensive to separate. Starting early can reduce the time between sign and close, reduce complexity and cost and reduce Transitional Service Agreement (TSA) scope.

5. Align goals and objectives of carve-out management and employees to the organizational goals of the transaction.

6. Right-size the organization being transferred and establish a process to transfer employees.

• Consider the carve-out operating model and talent requirements in readiness for Day 1.
• The existing organization model is often not optimal for the future state of a carved-out business that will operate independently or be integrated into a buyer’s operations — an appropriate size optimizes costs.

7. Define TSA requirements and service delivery model. This helps buyers understand complexity and cost to operate on Day 1 and to exit TSAs; a proactive approach also helps sellers identify and remediate stranded costs.

8. Develop the stand-alone cost model. Understand costs to run components of the business that transfer with the carve-out. Identify and understand incremental costs required to run the business (e.g., non-transferring back office functions, additional applications).

9. Initiate separation planning and begin mobilizing resources.

• Most separation activities occur between signing and closing, but planning and implementing early can shorten this timeframe and help reduce the need for TSAs.
• Finance, human resources, supply chain and IT functions are typically the most affected, requiring significant planning and resources to successfully separate.
• Legal entity separation and stand-up activities impact most functions, so the seller must integrate interdependencies into planning to reduce disruptions.