Buyers must be cautious and should take the following measures to mitigate execution risk, thereby minimizing probability of losses and, in turn, to maximize returns.
1. Know what’s in vs. out
Developing a clear understanding of the deal perimeter should be the first step in analyzing the carve-outs.
2. Thorough evaluation of stand-alone costs
The buyer must always conduct a detailed assessment of the seller’s costs.
3. Strong leadership and communication
This executive will need to not only make difficult decisions during the separation but, more importantly, garner the organization’s support for these decisions.
4. Shed unnecessary business complexities
Owing to the nature of carve-outs, such entities might come with unnecessary complexities like redundant processes, a bloated operating model and a cost-ineffective infrastructure, which typically arise due to being part of a larger and more complex organization structure.
5. Know your talent
Buyers should devote adequate time during the diligence process to get to know the carve-out’s leadership team that is coming with the deal.
6. Create value as part of the agenda
A robust and complete execution strategy should be designed up front and should not be left for post-close.
7. Understand the one-time costs
Typical areas requiring special focus include technology, financial audit, employee retention and benefit transition, transitional service agreements (TSAs), re-branding, facilities, and various third-party support.
8. Contractually separate the shared agreements
Assigning or re-negotiating such agreements is time consuming and must be initiated promptly to minimize impact on day one operations of the carved-out entity.
9. Adequate diligence to develop a well-structured TSA
The buyer should take utmost caution while drafting these agreements and confirm that they clearly specify the required areas, service qualities, costs and payment terms, governance structure, service levels, duration, and ability to terminate.
10. Plan for the unexpected
It is imperative that buyers understand certain market-facing risks and prepare a hedge to mitigate or best sail through in case any divergence or disruption occurs.