To remain competitive, preserve its profitability or optimize its organization, a company can choose to carry out a carve-out, a complex operation with many regulatory and human challenges, which responds to large-scale strategic issues.
What exactly is a financial carve-out? When to set it up? And above all, how to make it a success? Here are our tips.
What is a financial carve-out?
Carve-out is an Anglo-Saxon term that can be translated as “carve-out”, or “separation”. This is an operation aimed at separate one of a company’s activities or entities or a group, in order to give it financial, organisational and legal autonomy. This separation can then lead to a sale, the creation of a brand new subsidiary or a partial IPO. Carve-out is, in other words, an intermediate step, prior to complete separation and it involves a total restructuring .
There are several types of carve-out:
- Operational carve-out : in this case, the split consists of preparing the new entity for a change in governance or internal organization;
- The strategic carve-out : here, the purpose of the operation is to allow the parent company to refocus on its core activities and to lighten up part of its offer perceived as non-priority;
- The financial carve-out : this often aims to sell the least profitable activity in order to limit costs and inject liquidity into the most promising activities.
When to carry out a financial carve-out?
A finance carve-out can be considered at any time in the life of the company. Examples of carve-out include:
- To carry out a strategic repositioning and focus on its core business, by separating itself from its activities deemed to be the least promising, the least strategic or the least profitable;
- Before a sale : prior to the sale of the business, the carve-out facilitates the independent valuation of the entity and secures the transaction process.
- In the context of a partial initial public offering (IPO): the carve-out can also make it possible to list a subsidiary on the stock exchange, while preserving the link with it.
- Following a merger or acquisition (M&A): after such operations, carve-out can make it possible to reorganize the group’s activities and to comply more easily with regulatory requirements.
- To optimise the company’s financial and tax management: a carve-out operation can also meet the objectives of tax optimisation and financial restructuring. Indeed, by separating activities in this way, it is easier to isolate debts, reduce costs and maximize the value of the activity.
How to make a successful financial carve-out operation?
A financial carve-out is a complex operation, which is subject to a strict legal framework and contractually imposed deadlines, and which responds to several large-scale issues, both for the divested entity and for the parent company.
To succeed in this operation, here are some good practices to follow:
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Clarifying the strategic objectives of the carve-out
Before starting any steps, it is essential to explicitly clarify what the strategic objectives of the operation are : an IPO, a sale, a merger…? What are the expected results for the divested entity and for the group? This preliminary step is fundamental to defining a clear and solid strategy that will guide all future decisions.
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Conduct an audit of the target entity
Another prerequisite before carve-out is to independently evaluate the entity concerned: assets, liabilities, human resources, financial flows, etc. This audit can be supplemented by due diligence in-depth analysis. This makes it possible to assess the ability of the structure to be autonomous, but also to estimate its value in the event of a sale, among other things.
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Preparing for the transition at the organizational level
In order to prepare the entity for the carve-out, it is essential to establish dedicated governance and to set up performance indicators and to duplicate certain services (finance, legal, marketing, etc.). It may also require data migration, the implementation of a new information system, or the renegotiation of certain contracts in order to ensure business continuity independently.
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Anticipating regulatory and tax impacts
During a carve-out, the main risks are of a fiscal and regulatory nature. It is therefore essential to be accompanied by tax and legal experts to ensure the proper tax and legal compliance of the operation.
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Preparing for change management
A financial carve-out also comes with many human challenges. Pros Limiting resistance to change, it is imperative to inform employees well in advance of the operation, to maintain continuous communication throughout the carve-out and to support each of the stakeholders in this transition.
In addition, it is important to carry out a follow-up after the operation, to support department managers and managers in taking up their duties, to ensure the good operational continuity of the operation and to optimize internal processes if necessary.
Do you want to carve-out your group financially?
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