How to successfully negotiate the challenges of a carve-out


Anyone who has ever been involved in a carve-out will know exactly what we mean when we say that it’s a troublesome process.

In standard deals, private equity isn’t exactly easy to comprehend. When carve-outs enter the picture, these complexity levels take a turn for the ridiculous.

We by no means expect that by the end of this guide you’ll know how to successfully negotiate every challenge that a carve-out could possibly throw out in front of you. However, it should hopefully open a few eyes and highlight some of the common areas that carve-outs create problems in.

We’ve scoured the web and pulled some tips from some of the most reputable figures in the private equity game. For example, Marc Leder and his Sun Capital company have previously spoken about middle-market carve-outs and some of the issues that should be considered here. All such information has been compiled and if we were to pick some of the most important areas to stay on top of during a carve out, we’d start with the following.

What’s happening with the employees?

It’s an old cliché, but they say that a business is only as good as its employees. Taking this logic into account, it begs the question on just who is making the switch over to the new business.

Suffice to say, some employees will have been responsible for making the business the success it has become. It’s for this reason that the seller will probably want to keep such individuals and if is the case, a solution needs to be in place as to who can fill the void appropriately.

What contracts are required by the carve-out?

This is an area which is often overlooked. Contracts are absolutely critical during the carve-out process though and while the business as a whole may have a relationship with a particular vendor, by the end of the carve-out this might be non-existent if the contract hasn’t been analyzed.

At times, the acquired business might not need to do anything and everything will continue to run smoothly. However, there might also be occasions where further communication is required to ensure that either goods or service are going to be delivered as normal for the buyer.

What is the seller providing during the transitional phase?

This relates to services and unsurprisingly, it can often be a debatable topic between both parties.

It’s impossible for a carve-out “just to happen”, both parties need to co-operate. The seller will initially need to provide some services in the early stages of the transitional process to allow business to continue as normal. These services need to be outlined as a matter of urgency.

Who keeps the assets?

We’ve spoken about employees and contracts, so it stands to reason that a discussion needs to be held in relation to the assets and who actually gets them.

Again, this can be a debatable topic. The seller will naturally want as many as possible, whereas the buyer will know that certain assets are essential for the continued upkeep of the business.