A carve-out transaction involves the divestiture of a business unit or division, which can be structured either as the sale of entity interests or as an asset sale. These transactions are typically complex and require extensive planning to separate the divested assets or entities from the parent business. Below are key considerations for executing a successful carve-out:
1. Preparation & Messaging
Structuring
- Identify potential challenges early and assess tax implications to determine the most effective transaction structure.
- Engage financial, legal and tax advisors early in the process to streamline planning and execution.
Messaging
- Develop a clear, consistent communication strategy to address stakeholders, including business partners, employees, management and the public.
- Proactive messaging can minimize uncertainty and maintain trust throughout the process.
2. Operational Considerations
Address Operational Entanglements
- Clearly define which assets, contracts and operations will be included in the sale and which will remain with the parent company.
- Create a detailed inventory of divested assets and prepare a post-transaction representation of how both entities will operate.
Assess Post-Transaction Impact
- Evaluate post-divestiture operations, including cash flows, cost structures and tax implications, to ensure both parties are well-positioned after the transaction.
Transition Services
- Determine the buyer’s requirements for transition services to ensure critical functions remain operational during the ownership transition.
- Key elements of a Transition Services Agreement (“TSA”) include:
- Term: Define how long services will be provided.
- Scope: Clearly outline the services to be delivered.
- Cost: Set pricing to cover the seller’s expenses without overly burdening the buyer.
- Sellers should aim to limit the duration and scope of transition services to avoid unnecessary distractions or costs.
3. Carve-Out Transaction Phases
Phase 1: Preparation
- Marketing Materials: Define key selling points and prepare materials, such as management presentations and information memoranda.
- Confidentiality: Draft and execute confidentiality agreements.
- Market the Transaction: Identify and finalize a list of potential buyers.
- Seller-Side Diligence: Resolve carve-out-specific issues (e.g., shared contracts or segregating assets) and gather necessary legal and financial documentation.
- Data Room: Prepare a virtual data room with all due diligence materials for buyer review.
Phase 2: Initial Negotiations
- Facilitate due diligence visits and provide requested materials.
- Respond to buyer questions and concerns.
- Negotiate letters of intent (“LOIs”) with potential buyers and select a finalist.
Phase 3: Negotiating the Deal
- Draft and finalize the Asset Purchase and Sale Agreement and other ancillary agreements such as any officer’s certificates and promissory notes.
- Coordinate any additional due diligence required by the buyer.
- Execute definitive agreements and obtain necessary regulatory or stakeholder approvals.
- Prepare for closing by addressing any pre-closing conditions.
Phase 4: Closing
- Finalize the transaction at closing.
- Fulfill any post-closing obligations, such as those under the Transition Services Agreement or other covenants.
Carve-outs demand meticulous preparation, careful management of operational complexities, and clear communication to stakeholders. By addressing these considerations, sellers can maximize value while minimizing risks and disruptions associated with divestiture.
