21 Jan Challenges and Opportunities with Carve-Outs in M&A

This episode is all about considering a Carve Out when starting on your M&A journey.
Challenges and opportunities with Carve-outs in M&A
Mike and Ryan from Revenue Rocket discussed the concept of a carve-out in the context of tech-enabled services companies, where a non-core business unit or division is divested to allow the company to focus on its core offerings and achieve more radical growth and profitability.
We explore the complexities of accounting for shared services and resources during a carve-out acquisition, as well as the importance of understanding the ongoing nature of the carved-out entity, its leadership, employees, and costs to operate as a standalone business.
The conversation highlights the potential benefits and challenges of carve-out transactions, and the need for careful due diligence and valuation analysis to ensure a successful outcome.
Key points
- Carve-outs are when a company divests a non-core business unit that is a distraction or drag on profitability. If you have a non-core business unit, consider divesting of the non-core asset allowing for monetary gain, and more importantly, focus on core business lines.
- Maintaining a separate P&L and balance sheet is critical when considering a carve-out. Buyers will need to understand what’s remaining and what’s being acquired.
- Buyers must carefully account for shared services and their impact on the carve-out’s profitability.
- Buyers should thoroughly assess the carve-out’s leadership, employees, and ability to operate as a standalone entity.
- Carve-out valuations may be lower than a standalone business due to the added complexity and risk.
- Carve-outs can provide a balance sheet boost and allow the company to focus on its core business.
- Carve-outs with a limited customer base can still have significant value.
- Communication about the carve-out should be limited to a “need-to-know” basis until the transaction is near completion.
- Buyers must deeply understand the carve-out’s ongoing operations, financials, and what functions need to be filled.
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