How to carve out a business successfully

If you have decided to sell one of your businesses or disband a joint venture, this advice will make the difference.

The complexity of carve outs

Many businesses are integrated in some form to maximise synergies, whether that is shared services, shared distribution routes or shared customers.

When you carve out a business, unpicking the integrated aspects can be fraught with danger.

These simple steps reduce the friction between the buyer and seller, maximising value and goodwill.

Think like a buyer

Identify the value a buyer can achieve, value that you are either not interested in or are unable to access. Put yourself in their shoes. What would you want to see if you were acquiring the business?

It can be hard to break away from your needs in the carve out whether that is speed to value, reducing the complexity, just getting the deal done, or achieving the maximum value. Disrupt your team by appointing one person as the ‘buyer’ to deliberately provoke you and help you see things from their perspective.

Preparation

Where possible carve out and make the operation to be separated standalone with at least 12 months clean (and audited) financials BEFORE you start the sale or investment process.

This gives investors clarity, builds trust and protects value.

This is a luxury that is rarely put in place, but one that makes a big difference to speed, complexity and value. If you plan to be a serial acquirer/disposer build a modular approach to how you achieve your synergies.

Trust

Build trust with your potential buyers at every step. This is the most important thing you can do between the deal teams.

Ensure that you have credible, competent leaders who will remain with the separated business. Walk the talk. Reduce the nervousness in the buyer by doing the right thing, repeatedly.

Know when to negotiate hard, and when not to. Building trust enables flexibility which both parties will appreciate. Use guidelines and principles to agree the what, rather than the how.

The art of the possible

If it isn’t practical to carve out the business ahead of sale; know the ‘art of the possible’ when negotiating or designing transition or other services.

This is a time to build trust. Put yourself in the buyer’s shoes. Make it easy for them to see and get to the solutions that they need.

Proactively building trust leads to greater risk taking on both sides which in turn leads to greater speed, reduced complexity and more value.

Due Diligence

Don’t underestimate the load on your teams for due diligence or prospectus creation. Buyers and Investors love detail. It is a distraction to all, especially senior leaders, especially when secrecy is involved.

Resource carefully so that it does not impact performance.

Proactively manage the due diligence process. Where a request is onerous, establish the problem the potential buyer is trying to solve and see whether you can reassure from a different angle.

In our experience, businesses shrink during the period when they are being offered for sale, due to the top leaders being distracted, sometimes by as much as 10% in patriarchal businesses.

Be ready to explain

Your corporate structure, operational and system choices make sense to you but not to a buyer.

Expect to simplify, decode and explain why and how the separated business works. Reduce or eliminate complicated business arrangements with previous owners and others.

Work out what is the minimum you need to share to make sense of the business being carved out. Make it simple to understand.

What is connected?

Know what is shared between the parent and the entity to be separated. Accept that there will be a loss of synergies for both parties.

Map the interfaces. Look for ways to simplify the business in its future state.

Focus on the connections and links to external parties, whether that is the selling group, or other partners. The buyer may change anything they wish within the purchased entity, the connections take longer.

Transition Services

It is rare that you can avoid transition services, however much you try to. Few organisations are set up to provide third-party services to an outsider, a competitor even.

This can be complex and time-consuming. Invest ahead of the sale process.

Use clean rooms as a tactic to protect sensitive shared data or speed up data transfer. Limit access to sensitive systems to those in the cleanroom.

Where you have competitively sensitive systems that cannot be disconnected, consider a physical clean room with a supervisor to oversee access. The psychological benefit is wide ranging.

Software licences are rarely transferable and are likely to have restrictions on the provision of third party (transition) services.

Put entity specific arrangements in place where possible. The buyer may already have corporate licenses which cover software transferring.

Shared services benefit from flexibility within the operations. Security and firewalls may not be in place to manage competitive or third-party access.

Create separate (duplicate) environments if possible.

Putting a firewall in place, or reconfiguring your security approach to allow a third party to access systems is complex and costly. It can run into the $millions. Think ahead and create standalone systems wherever possible.

Summary

Carve outs are often more complex and demanding than you think. Know what is likely to cause complexity and mitigate for it to reduce value loss and speed up time to separate.

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With 30 deals, worth over $6bn, from large multinationals to small founder-led acquisitions the Pike Squared team has the experience to help you navigate the integration or carve out of your businesses, delivering your deal value.