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Building on our recently introduced “sunsetting” approach, it's important to consider in detail how to carve out a business into a separate legal entity, which is often an essential step to start the journey and can help to create and capture value early on.
Carve-outs are an increasingly frequent occurrence across the globe. They cover a broad range of business sizes - from local fringe businesses to global large-scale spin-offs with multi-billion turnovers. In a sunsetting scenario, the formal separation legally “ring-fences” the business and facilitates the execution of certain sunsetting activities, driven by increased focus and accountability.
Sunsetting a separated business increases the degree of freedom compared to a wind-down in a non-standalone scenario. The carve-out of the affected business unit also reduces interdependencies and adverse impacts on other business units at an operational level. If the sunsetting period is expected to cover a substantial period of time, a carve-out ensures sufficient independence to execute a wind-down plan effectively.
Using a carve-out within a sunsetting process requires focus. Particular consideration should be given to specific topics. These begin with designing the future set-up in general (often referred to as "Target Operating Model" - e.g. legal form, required back-office functions or roadmap for headcount development) and extend to more granular details, down to assigning organizational units to separate legal entities and adapting individual contracts. Initial attention should also address structural value creation, such as shifting organizational focus to specific parts of the business (e.g. services) and headcount adaptations.
The carve-out process itself can be time-consuming with many legal, tax and operational complexities to be considered. While it is often beneficial for sunsetting situations, it is worth weighing “pros” and “cons” before embarking on the carve-out journey.
Once the decision has been taken, a careful planning and rigorous implementation is key. A carve-out can be legally and operationally implemented within a few intense weeks; however, depending on size and set-up, it could also take up to several years to separate a complex global business from its existing legal and operational structure.
Much also depends on the quality of the preparation. A swift and comprehensive planning process, driven by a dedicated core team including experienced carve-out project managers and affected front- and back-end key functions will deliver a clear Target Operating Model for the carved-out business and the definition of key parameters of the implementation plan.
Once the scope has been defined, all affected resources, assets and headcount must be allocated to either exit, stay (at “RemainCo”) or transfer to the “NewCo”. Corporate functions (e.g. Finance, IT, HR) usually serve multiple businesses and while costs can in theory be split between several units, future sunset operations will benefit from higher independence. Financial liabilities must be clearly allocated, especially debt and pension schemes.
A common theme in the initial transition period is the establishment of Transfer Service Agreements (TSA), which guarantee continued support from the parent company (e.g. access to ERP systems and maintenance, use of shared office space, brand licenses). There should be a specific timeframe around these dependencies, usually six to 18 months. This should encourage the sunset business to find an adequate standalone solution, while ensuring business continuity. In addition, particularly in sunsetting scenarios, the need for reversed TSAs should be analyzed carefully, e.g. in case intellectual property is being carved out which is still, at least partially, required at the "RemainCo".
Comprehensive checklists and experience are required to ensure a smooth transition and “Day 1 readiness”. The latter is vital and should constantly be kept in mind throughout the whole carve-out project by a dedicated Project Management Office (PMO). Ideally, all end-to-end business scenarios, such as ‘Order to Cash’, ‘Procure to Pay’ and ‘Hire to Retire’, are transferred to the carved-out entity on Day 1 without displaying any visible impact on business operations.
Critical issues often arise at the intersections of business processes and units, so any up-front analysis of early identified risks requires moderated discussion, scenario sketching and cross-functional collaboration. The involvement of subject-matter experts is a key success factor to ensure that all relevant business processes are analysed and included in the carve-out planning.
The evaluation of risks and mitigation measures tends to evolve throughout the process, particularly due to decisions taken, e.g. on legal entity set-up, organizational design principles and headcount allocation. Some mitigation measures need to be prepared in all projects as a fallback option to avoid potential damages, for instance to ensure stable payment and payroll processes, triggered by ERP changes.
Finally, a proper communications program to all stakeholders must be developed, in particular to affected employees. This is often underestimated but crucial in preparing a smooth transition for the separation, to ensure an energetic start for the separated business post-Day 1.
