Companies are increasingly pursuing a “carve-out platform” approach to make businesses divestment-ready. Under this approach, systems, processes and even legal entity separation work begin before the deal process starts. Initiating this work before a buyer is known helps accelerate the separation and stand-alone timeline and minimize TSAs. For example, 32% of companies reported that an optimized legal structure was the most important step in enhancing sale value. Sellers may also negotiate reimbursement for the related separation and stand-up costs because buyers receive control of the divested business sooner.
Make tax a top consideration
Tax is a central consideration during the carve-out process, and work should align with the portfolio review process. Far too often, a decision to divest is made without appropriately considering tax implications. In fact, two-thirds of companies say a lack of preparation in dealing with tax risk was a major cause of value in their last divestment.
Sales processes often stall when sellers fail to recognize that potentially skeptical buyers may have a completely different view of the risks associated with tax-efficient structures implemented historically.
Companies must also consider country-by-country requirements. As tax reform initiatives continue to roll out around the globe, 45% of companies say they expect an increase in tax challenges as they execute deals.
Understand work stream interdependencies
Businesses built on years of acquisitions, complex systems consolidation or shared service centers are intertwined at functional levels, including finance, tax, supply chain, treasury, procurement, legal, technology, human resources and sales. More than half (56%) of companies say lack of understanding around work stream interdependencies — and the critical path to disentangle them — derailed or delayed the closing of their last carve-out. And 50% of companies say failure to present the business as a stand-alone “scared off” potential buyers, eroding value in their last divestment.
Companies can evaluate how to disentangle the business for sale before the formal process by:
- Appointing leaders to oversee each function from the start of the process and establishing clear lines of communication
- Reviewing revenue streams to allocate costs within the asset to be divested and avoid stranded costs
- Developing the post-transaction operating model for the parent company as well as the carve-out business, with work streams clearly defined
- Devising the optimal short- and long-term tax strategy as part of the separation strategy and operating model
- Minimizing transitional services agreements (TSAs) where possible
Mapping out interdependencies early and creating an ongoing dialogue between cross-functional teams drives transaction governance and ultimately value for all stakeholders in terms of timing and net proceeds. In a recent divestment, a seller’s preferred buyer — also with the highest bid — walked away during the diligence process because of obvious entanglement issues. This resulted in the seller accepting another bid 20% below that of the first and more complicated public financing requirements.
Mitigate stranded costs
Identifying potential stranded costs early can allow sellers the opportunity to develop mitigation plans. Companies often minimize the effort required and the time pre- and post-closing to complete those plans. We often hear from companies, “This can only be done close to closing” or “We know the costs included in the deal, so this will be easy.” However, many costs in the deal are often shared or allocated in nature. Accordingly, companies need to examine shared costs across business units, including those charged to the carve-out. Corporate allocations, business charge-ins and charge-outs, services provided with no, under-, or over-allocated costs, shared people and facilities are all key inputs relative to stranded costs. There are several sources of stranded costs and related key considerations — knowing these can save precious time while preserving value going forward for the seller.