1. Fully understand the perimeter of the deal
To properly value the asset and determine how to best separate it from its parent, you need to understand everything you’re getting — and not getting. For example, which accounts, legal entities, IT services, personnel and facilities are included. Are contracts still intact with customers and vendors? Will you need to communicate with unions before reorganizing staff? The questions go on and on, and you need answers to them all.
“You must understand the scope of assets, contracts, liabilities, employees — everything included in the deal,” says Shah. “For one PE buyer, we quickly identified ongoing expenses in operational areas which were not fully addressed and reflected in the estimated standalone financials.”
Carved-out companies often lose all kinds of support, from treasury and audit to finance and IT, which the parent company had provided previously. “In the case of one PE firm looking to acquire a consumer products business, we found operations, tax, HR and financial dependencies that could have disrupted their ability to stand-up as a business on Day One,” says Paul Fuhrman, principal at Ernst & Young LLP.
Clearly defining the deal’s perimeter is critical when evaluating the true asset value of the carve-out and understanding what functions need to be built by the carved-out operation.