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Carveout transactions

The acquisition of a business unit often comes with a lot of complexity

Scott Becker

November 2, 2018

By: Scott Becker

While any business acquisition comes with a level of complexity, a carveout can become significantly more challenging. Having performed four carveouts in the past six years, I can say that they are both more intricate than a straightforward business acquisition and require more focus. To be clear, a carveout is an acquisition of a business unit from a parent company where the parent company is providing shared services. Our biggest carveout acquisition was when we bought a $190 million business unit from a large European chemical company. This entity had operations in the Netherlands, the U.S., Canada and Australia.

The unit had hundreds of customers and thousands of SKUs. While it had a solid management structure, much of its back-office operations and some of its plant administration were conducted by the parent company. This included such things as the collection and payment of accounts receivables and payables, global banking, lockbox controls, IT infrastructure and management and payroll, just to name a few.

Details matter 

So, in addition to the normal due diligence work, we needed to fully comprehend the existing parent’s shared services capabilities and how we would take over these functions around the globe. It required a very detailed understanding of both function and process. Thus, a whole new complexity was added to our diligence plate. It was clear that we could not take on all these operations on day one after the acquisition.

Our solution was to engage the parent company. We sought a transition service agreement that would apply to some of the tasks while we developed the capability to assume every function. IT was the most complex operation as it cut across the entire operation of the business unit. With the vast number of SKUs and customers, we negotiated a one-year transition service agreement for this function. During this time frame, we cloned the parent’s IT system and trialed it multiple times to perfect it before we cut over to our system. We also built the capability to assume all other shared functions and become fully self-sufficient.

Overall, the key was to fully understand the intricacies of each shared service and its cost to the business, and then develop a plan to implement within our business in a relatively short period.

We successfully acquired the company. More importantly, we met our timetable to become fully self-sufficient in the functions previously handled by the former parent company. We realized this by conducting weekly meetings on key aspects of the carveout. This allowed us to manage the transition and build an internal capability in a reasonable time frame.

Here are some key segments of a typical business and the corresponding focal points to zero in on when you’re involved in a carveout transaction:

  • Employees: Determine who comes with the acquisition.
  • Accounting: Evaluate existing policies and terms.
  • Banking: Verify if existing institutions will assume existing arrangements with the new business unit owner.
  • Tax: Understand the array of tax opportunities and exposures.
  • Legal; environment, health and safety; engineering: Evaluate the amount of internal support and cost for the business unit.
  • IT: What IT systems are in place? Can the processes be absorbed quickly or is a new system needed? Also, define software licensing issues.
  • Communications: How is this managed and at what cost?
  • Assets: Define which belong to the business unit.
  • Contracts: Will existing vendors meet the terms of existing agreements?
An intense process

In a carveout, identifying shared corporate costs is essential to bridging historical financials to a new stand-alone entity. In some cases, the existing cost structures can be more expensive as a stand-alone versus being provided by a large parent. It is essential that detailed diligence is carried out on such allocated costs. In our acquisition of this carveout, we ended up spending less than the parent on most of the shared costs, but the transition was an intense path.

Scott Becker is president and CEO of Ashtabula-based Chromaflo Technologies Inc., which has completed 10 acquisitions, including five in the last five years. His columns explore how he finds acquisition opportunities, the challenge of negotiating value and the integration template he uses to achieve a successful result.

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