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Carve-Out Transactions – Step by Step to a Successful Partial Sale

A carve-out refers to the separation of a business unit or division with the aim of subsequently selling it. This complex transaction requires careful planning and a structured approach to maximize value and minimize risks.

This guide walks you through all the essential phases of a carve-out transaction and provides practical recommendations for entrepreneurs and executives.

What Exactly Is a Carve-Out and When Does It Make Sense?

A carve-out is the detachment of a part of a company from the parent company with the goal of selling it as an independent entity or otherwise monetizing it. Unlike a full sale, the core company remains intact while only selected business units are divested.

A carve-out can be strategically sensible in various situations:

• When a business unit no longer fits the core business and needs strategic realignment.

• When financial resources need to be freed up to further develop the core business.

• When a business unit has better growth prospects under new ownership.

• When regulatory requirements mandate the separation of certain business units.

For more information on the optimal timing for a business transaction, see our article When Is the Optimal Time to Sell My Business?.

What Types of Carve-Outs Are There?

Carve-outs can be executed in various legal and structural forms:

1. Asset Carve-Out

In an asset carve-out, individual assets and liabilities are separated from the parent company and sold. This form is common in smaller transactions or when selling clearly delineated assets.

The asset carve-out offers tax advantages for the buyer, as it allows them to reset the depreciation base of the acquired assets. However, all contracts, licenses, and permits must be transferred individually, making the process complex.

More details on asset deals can be found in our Glossary Entry on Asset Deals.

2. Share Carve-Out

In a share carve-out, the business unit to be separated is first spun off into a separate company, whose shares are then sold. This method enables a clean legal separation and simplifies the transfer process.

The advantage lies in legal continuity, as the new company continues existing contracts, permits, and employee relationships. Depending on the jurisdiction, sellers may benefit from tax advantages due to participation privileges.

More information on the tax treatment of share deals is available in our Glossary Entry on Share Deals.

3. Spin-Off

In a spin-off, the shares of the separated entity are distributed to the existing shareholders of the parent company. This form does not immediately generate sales proceeds but creates two independent companies.

A spin-off is particularly suitable when two business units pursue different strategic directions and are to be valued independently on the capital market.

How Does a Carve-Out Process Work?

A successful carve-out process typically consists of five main phases:

1. Strategic Analysis and Planning

In this phase, the fundamental decision to proceed with the carve-out is made and strategic goals are defined. A thorough analysis of the starting situation forms the basis for all subsequent steps.

Key activities include:

• Defining the exact scope of the carve-out (which business units, assets, employees, and liabilities)

• Conducting a preliminary valuation of the business unit to be separated

• Creating a detailed project plan with timelines, milestones, and resource allocation

• Assembling a qualified project team from internal staff and external advisors

Careful planning in this phase lays the foundation for the success of the entire transaction.

More on strategic planning can be found in our article Value-Oriented Strategy in Business Succession.

2. Operational Carve-Out and Preparation

In this phase, the business unit to be separated is operationally detached from the parent company and set up as an independent entity. Particular attention is paid to disentangling shared resources and functions.

Key tasks include:

• Developing a detailed carve-out concept with clear delineation of assets, contracts, and processes

• Identifying and resolving interdependencies in IT, HR, finance, procurement, production, and sales

• Developing transitional service agreements (TSAs) for services temporarily provided by the parent company

• Preparing the necessary legal documents for the separation

A clean operational separation is crucial for the subsequent valuation and attractiveness of the unit to potential buyers.

3. Financial Reporting and Valuation

Creating standalone financial statements for the separated unit is one of the biggest challenges in the carve-out process. Buyers require reliable financial information to assess the unit’s value.

Required measures include:

• Preparing carve-out financial statements (historical and pro-forma)

• Adjusting financial figures for intercompany transactions and shared services

• Conducting a professional company valuation considering standalone costs

• Identifying value enhancement potentials for potential buyers

Transparent and comprehensible financial reporting increases buyer confidence and can lead to a higher valuation.

Learn more about valuation methods in our articles on the DCF Method and the Multiplier Method.

4. Sales Process and Negotiation

After preparation is complete, the actual sales process begins, following typical M&A procedures. The challenge lies in convincingly presenting the independence and potential of the separated unit.

The sales process typically includes:

• Preparing an information memorandum and management presentation

• Identifying and approaching potential strategic and financial buyers

• Conducting a structured bidding process (auction) or negotiating with selected interested parties

• Organizing and moderating the due diligence process with a focus on carve-out specifics

Professional management of this process can significantly influence the sale price and should therefore be conducted with experienced M&A advisors.

For more information on this topic, we recommend our articles Business Sale Step by Step and M&A Advisors as Strategic Partners.

5. Transaction Execution and Integration

After successful negotiation and signing, the actual transaction execution (closing) and subsequent integration or separation follow.

This phase includes:

• Fulfillment of all closing conditions (e.g., regulatory approvals, consent from contractual partners)

• Physical and legal transfer of assets and contracts

• Implementation of transitional service agreements (TSAs)

• Support for integration into the buyer’s structures or establishment as an independent company

Careful planning and execution of this phase minimize operational disruptions and secure value creation post-transaction.

Helpful tips for the post-acquisition phase can be found in our article The First 100 Days After Acquisition.

What Challenges Typically Arise in Carve-Outs?

Carve-out transactions are complex and involve numerous challenges that should be addressed early:

1. Operational Interdependencies

One of the biggest challenges is the extensive interdependencies between the business unit to be separated and the parent company. This concerns shared systems, processes, and resources.

To solve this, detailed disentanglement plans should be developed early, along with transitional service agreements (TSAs). The costs for standalone functions must be realistically calculated and included in the valuation.

2. IT Systems and Data

IT systems and data sets are often tightly intertwined and difficult to separate. The carve-out frequently requires duplicating systems or implementing new solutions.

A dedicated IT carve-out team should analyze all systems, applications, and data and develop a structured migration plan. Data protection aspects must be carefully considered.

3. Employees and Know-How

Securing know-how and key employees is critical for the success of the carve-out. Uncertainty and lack of prospects can lead to unwanted turnover.

An open communication strategy and clear future perspectives for affected employees are essential. Retention programs for key personnel and early involvement of the works council can help retain talent.

More on employee management after acquisitions is available in our article Employee Management After Acquisition.

4. Contractual Complexity

Existing contracts with customers, suppliers, and service providers must be reviewed and, if necessary, renegotiated. Contracts often contain change-of-control clauses or are not easily transferable.

A systematic contract analysis should be conducted early to identify critical contracts. Timely involvement of key business partners can increase acceptance of the transaction.

5. Regulatory Requirements

Depending on the industry and region, various regulatory requirements can increase the complexity of the carve-out. This especially concerns permits, licenses, and compliance aspects.

A thorough regulatory due diligence and early involvement of specialized lawyers help minimize risks and avoid delays.

More on due diligence can be found in our Glossary Entry on Due Diligence and our Due Diligence Checklists.

How Can the Valuation of the Carve-Out Be Optimized?

Maximizing the sale proceeds is a central goal of any carve-out transaction. The following factors can positively influence the valuation:

1. Demonstrate Standalone Competitiveness

Potential buyers must be convinced that the separated unit is independently viable. This requires a clear presentation of its competitive position and future prospects.

Creating a compelling business plan with realistic growth scenarios and synergy potentials can increase attractiveness to buyers. Early establishment of independent management structures underscores the unit’s autonomy.

More on value optimization can be found in our article Digital Transformation as a Value Driver Before Selling a Business.

2. Use Clean Room Data for Valuation

For carve-outs from competitively sensitive areas, setting up a clean room can be useful, where trusted third parties analyze and prepare sensitive information.

This enables a sound valuation basis without violating competition law boundaries. External auditors can prepare independent financial information for potential buyers within this framework.

3. Structure Transitional Service Agreements Attractively

Well-structured transitional service agreements (TSAs) can increase the carve-out’s value by ensuring a smooth transition and giving the buyer time for integration.

TSAs should clearly define services, realistic timeframes, and fair pricing. At the same time, they should incentivize timely full separation.

4. Tax Optimization

Tax structuring can significantly affect the net proceeds of a carve-out transaction. Different structuring options offer various tax advantages and disadvantages.

Early tax planning involving tax experts is essential. Particular attention should be paid to the transfer of tax loss carryforwards, treatment of hidden reserves, and international tax aspects.

More information on tax aspects can be found in our article Business Sale – What Taxes Are Involved.

What Legal Aspects Must Be Considered?

The legal structuring of a carve-out requires special attention in the following areas:

1. Corporate Law Implementation

Corporate law implementation can be done in various ways, e.g., through spin-off, split-off, contribution, or universal succession. Each option has specific advantages and disadvantages.

The choice of the optimal structure should consider tax consequences, liability issues, and transaction costs. For publicly listed companies, capital market regulations must also be observed.

More on legal aspects of business transactions can be found in our article Legal and Formal Aspects of Business Succession.

2. Labor Law Implications

The transfer of employment relationships is often a critical point in carve-outs. Many jurisdictions have special employee protection rules in business transfers.

Early involvement of the works council and transparent communication are essential. Particular attention should be paid to pension obligations, existing collective agreements, and company agreements.

More on labor law topics is available in our article Labor Law Topics in Business Succession.

3. Industrial Property Protection and IP

The allocation of intellectual property (patents, trademarks, software, know-how) must be carefully regulated, especially if these rights were previously shared.

License agreements or transfer contracts must clearly define which IP rights transfer to the separated unit and which remain with the parent company. Cross-license agreements can be a practical solution.

Further information on protecting intellectual property can be found in our article Securing IP and Trademark Rights.

4. Antitrust Review

Depending on the transaction volume and market position of the companies involved, an antitrust review may be required, especially for sales to strategic investors.

Early antitrust pre-assessment helps identify risks and plan the timeline realistically. In critical cases, preparatory talks with antitrust authorities can provide insight into possible conditions.

How to Achieve a Successful Carve-Out? The Key Success Factors

Based on experience from numerous carve-out transactions, the following key success factors can be identified:

1. Clear Strategic Objectives

A successful carve-out starts with clear strategic objectives communicated to all stakeholders. The reasons for the separation must be understandable.

This clear focus facilitates decision-making during the process and helps concentrate on value-enhancing measures. Regular review and adjustment of objectives during the process are advisable.

2. Dedicated Project Management

The complexity of a carve-out requires professional project management with clear responsibilities, realistic schedules, and sufficient resources.

An experienced project team with representatives from all relevant functions should be established. Involving external specialists for specific areas (legal, tax, IT, HR) is usually indispensable.

3. Early Disentanglement Planning

Operational disentanglement is often more time-consuming and complex than expected. Early and detailed planning is therefore essential.

A comprehensive disentanglement plan should cover all key functional areas and define clear milestones. Identifying and prioritizing critical paths helps detect bottlenecks early.

4. Proactive Stakeholder Communication

Open and proactive communication with all stakeholders (employees, customers, suppliers, investors) is crucial for acceptance of the carve-out.

A structured communication plan should specify who receives which information and when. Particularly for employees, honest and timely communication is important to reduce uncertainties.

More on communication strategy can be found in our article Internal Communication in Business Succession.

5. Realistic Assessment of Costs and Benefits

Carve-out costs are often underestimated while proceeds are overestimated. A realistic assessment is important for economic viability.

All direct and indirect costs should be identified and budgeted early. This includes advisory fees, IT investments, restructuring expenses, and any compensation payments.

Conclusion: The Path to a Successful Carve-Out

A carve-out is a complex undertaking that requires careful planning, professional execution, and continuous management. The key to success lies in addressing all critical aspects early – from operational disentanglement and legal structuring to employee communication.

With good preparation and professional implementation, a carve-out can unlock significant value – both for the separated business unit and the parent company. The time and resources invested pay off through a smoother process and higher sale proceeds.

Companies planning a carve-out should engage experienced advisors early and allocate sufficient internal resources. With a structured approach and consideration of the described success factors, the chances of a successful transaction increase significantly.

For more information on support from M&A advisors, see our article What Do M&A Advisors Cost?.