Are carve-outs a break-up where everybody wins?

An abridged version of this article appeared in the Chief Executive Magazine on March 4, 2025.

The business news is again littered with splits, spins, and carve-outs (ultracompetitive Honeywell announced two), all with the promise of making the parts more valuable than the whole for everyone involved. Carving out part of the business to sell or operate independently is a regular occurrence, frequently at the urging of a caring but vocal shareholder.

Of course, the big question is: Does it work? Does a carve-out really unlock the value so many insist it will?

In short, yes—if done right. For sellers, a carve-out can generate capital to be redeployed back into the remaining business (RemainCo) or used to pay down expensive debt. For some, the primary objective is to shed parts of the business that no longer fit with the future strategy, like when Olympus carved out and sold its cameras and microscopy businesses to fuel its transformation into a pure-play medical devices business.

For buyers, a carve-out can be lucrative if it opens the door to using creativity and operational expertise to create more value. This is particularly true for private equity buyers, where auctions of carved-out businesses are won and lost almost exclusively on price.

The benefits can be significant for both parties, and everyone has an interest in doing it right. To capture the benefits requires both parties to be well-organized and astute when dealing with the inevitable issues that arise when a business changes hands.

But—and this is a big but—results can vary widely depending on how well leaders handle a few critical issues.

What sellers must do

Example of a Successful Sell-Side Carve-Out A recent carve-out led by the authors used a combination of speed to reduce cost and harvesting low-hanging fruit that resulted in doubling the value received v. what was estimated by the Company’s investment banker.

For sellers, one of the central challenges is getting things done on time, without breaking the bank. An active project management office (PMO) is an essential ingredient. Each task gets a deadline and an owner who is prepared to actively manage the responsibility. In our experience, success rates improve when a carve-out team has been in the seat before.  They are more likely to avoid hard lessons that surface, sometimes urgently, under a tight schedule. Missteps can hold up a deal, and time is most definitely money.

An active PMO is not a bureaucrat asking the company for a mountain of data because it is “in the playbook.” Invariably, much of this information will prove to be superfluous for the unique circumstances of the situation. PMOs who operate this way do more to slow down a process, eroding any value they could add. In one carve-out with an elaborate PMO structure, the authors saw these requests take upward of 1/3 of management’s time and yield little in the way of real value.

Instead, the well-organized PMO focuses participants on prioritizing entanglements, helps leaders lay out what is required to get there, and only then drives those responsible into action.  With that in place, the execution team can stay laser-focused on getting it done.  There is a strong correlation between efficiency and achievement.

A carve-out team’s greatest focus is on entanglements and holes to be filled, such as separating systems, dividing shared facilities, and arranging for logistics. It works to address any gaps, such as standing up a department if the seller is keeping the old one. On the path to the value actualized break-up, entanglements that are poorly handled can throw cold water on stakeholder value expectations.

Filling a hole is a significant and time-consuming undertaking. A common example is setting up a treasury function, something that commonly stays with the seller. A new function needs to be built to suit; roles filled, cash movement needs worked out, a system to meet those needs identified, accounts opened, and so on. One sees how the degree of difficulty and risk spikes during this critical process, as brand new hires are needed just to get everything done.

What’s your blueprint?

Creating a blueprint for the carve-out and then “building to the print” is also key. Avoid the temptation to gather data before you know what you’re trying to build (a common problem with a “checklist” approach). Starting without a blueprint also wastes valuable time for employees who end up pulling the data. In one poorly designed carve-out, the authors (as seller advisors) watched the buyer team try to set the number of employees needed to staff each function in an independent CarveCo. This exercise produced results that were far off the mark, with errors of as much as +/- 50 percent. A much better approach is to ask the company for input on needs before justifying, instead of doing it alone.

For the benefit of all involved, it is important to align on an aggressive but realistic timeline. A good timeline challenges the carve-out team but does not overwhelm it. One recent client with global operations prepared a detailed map by function showing what needed to be in place by Day 1 so the business could continue to operate. From this, an aggressive but reasonable timeline was developed and aligned by all. What could not be done in time was covered in a transition services agreement (TSA). In each case, target dates were clearly identified and leaders able to decide how best to move things forward without confusion or delay.

Do not fail to communicate

A thoughtful, comprehensive communication plan might be the secret sauce in a well-executed plan. It is necessary for stakeholders and business partners to have a reliable source of information, rather than relying on rumors and speculation. Without it, misunderstandings and misalignment are almost inevitable. Communication is an area often overlooked and under-delivered by sellers, which can leave business partners on pins and needles wondering not just how they will be impacted but knowing that they will be. We have seen this have a debilitating effect on employees in particular, a situation that is wholly avoidable.

A reasonable picture of what is happening, even without all the details, can pay big dividends. This can be true even when the news is not what stakeholders want to hear. In one recent situation, the messaging for employees was bleak—most would be losing their jobs. The team met with them to share the news and explained how they would be treated (fairly). After preparing for a demoralized workforce, the feedback from affected employees was much better than that. As one put it, “We’re grown-ups. We can handle bad news. We just want to know what is happening.” It was a good lesson in the value of forthright communication.

Watch your TSAs

TSAs are used to handle entanglements that cannot be fully solved by closing. A good TSA is finite, with a clear plan to exit in a time frame both parties agree to meet. They are an expensive way for buyers to get services they cannot perform themselves, and the objective should be to exit as quickly as possible. Rely on TSAs only where it’s an absolute necessity to minimize complexity.  And never see your way into a TSA you can’t see your way out of. 

In one recent deal, a seller offered a poorly designed TSA for IT services that bundled many disparate programs into a single TSA service with a bundled monthly cost. Many of the applications in the bundle could be exited quickly. Since the TSA contained a single bundled cost, the buyer continued to incur the full charge so long as the last application remained. This structure was unreasonably expensive and led to painful renegotiations. One-sided TSAs that favor one side do not build trust. They can prove to be a real barrier to getting a deal done.

Stranded cost is an area where experienced sellers pay close attention. A carve-out of an operating unit will unavoidably leave costs that will no longer be absorbed. A frequent example is the employee with less-than-a-full job, usually at least partially managed by reallocating duties. Taking action to actively mitigate stranded cost early can be the key to protecting a seller’s margin after the deal closes and the TSA payments stop flowing.

What buyers must do

Example of a Successful Buy-Side Carve-Out A recent carve-out led by the authors on the buy-side identified operational improvement levers such as supply chain optimizations, operating model redesign, and IT applications rationalization to increase value by 40% of the purchase price. Financial levers and multiple expansions would be incremental means to maximize exit value. If the valuation creation is achieved over the first two years and the carve-out’s sales increase an average of 6% per year, the estimated ROI for this investment after five years, with no change in exit multiple and using typical leverage, would be 22%. This contrasts with the average long-term PE fund returns of about 13%.

A buyer of carved-out assets should be planning for the future almost before the first bid goes in. This is an important part of sizing up the value creation opportunity properly. It is especially important that due diligence considers a holistic set of objectives and a plan to achieve them. These include commercial, operational and technology objectives as the primary mechanisms through which a buyer realizes financial returns.

A balanced scorecard for underwriting a deal includes both upside and downside factors, and ways to reduce risk. Planning for risk upfront plays a significant role in making a deal successful. Two things are certain—there are always surprises, and they are seldom positive.

Most buyers, including financial buyers, will underwrite the opportunities in arriving at a valuation. Cost savings from headcount reductions make a frequent appearance, and commonly include outsourcing or moving functions to low-cost countries. Changes like these can reduce cost but take time and effort to realize. Too often, buyers underestimate (sometimes wildly) both the disruption and time required to make such changes while overestimating the benefits they can deliver—a double whammy!

We recently helped a seller in a carve-out where the buyer underwrote savings from sweeping changes in back-office functions and their location. Two years later, the buyer is far behind where its deal thesis intended. The greater the change, the more likely it will not go according to plan.  

Be real about people

Many consultants use benchmarks to estimate cost savings from headcount reduction. Benchmarks often do not adequately consider the underlying change that needs to happen to capture the savings. Take advice from those who have done it before—using realistic assumptions upfront is invaluable for setting expectations.

Buyers who carefully challenge underwriting assumptions and examine the planned actions in partnership with advisors who know how to make it happen typically have more success. In situations where headcount is reduced, the underlying work is left unchanged and the result is usually turmoil.

The importance of a clear-eyed evaluation of management cannot be overstated. Management may be top-flight and just waiting for their day in the sun to show what their team can do. A CEO may have been perfectly suitable running a division but be ill-equipped to lead a fully stand-alone business and unable to reach the heights a buyer believes are possible. If members of management are not a fit, wise buyers make plans to address it as soon as possible.

There can be an incentive for a buyer to work with existing management, who typically know both the stakeholders and the business. Still, the authors have seen too many situations where a buyer realizes quickly that a CEO is not up to the job, yet still loses months or even a year to act. Remember, it can take 2x that amount of time to find a suitable replacement once a decision is made. It is no surprise that the first year of ownership can be a bitter disappointment. With leverage always highest at the outset, the cost of waiting to act is greatest. Buyers who have seen this play out do not wait.

A frequent casualty of the carve-out is the CFO, particularly with financial buyers. The level of performance demanded by financial buyers, driven in part by a highly leveraged capital structure, is onerous. It can be beyond the capabilities of a CFO whose performance may have been stable operating under the protective umbrella of the former parent.  

To reiterate a point because it is so important, employee engagement should be a top priority. Employees will be concerned and unsettled, and the best will be thinking of leaving or making plans to. Building bridges early is critical to retaining the employees who are essential to the strong new enterprise. Remember, these employees likely have options. While there are limits on what is possible before a deal closes, it is important to do what can be done and to have a strong plan for immediately after closing when restrictions fall away. Introducing a new CEO to employees, putting a face on ownership, and sharing overall plans for the enterprise are simple but tangible ways to engage employees and go a long way toward relieving stress and allowing teams to stay focused on a smooth handover. 

TSAs & value plans

Having a plan to exit TSAs with specifics is vitally important. TSAs are expensive, so taking time to really understand how to get rid of them is essential. The seller typically sets the TSA service charge based on its (often generous) assessment of cost to keep performing the services. It is important that service levels be carefully crafted and understood fully by both parties.  There is a natural tendency for sellers to keep descriptions vague so it’s up to a buyer to insist on specifics. Failure to align on the service levels can lead to unexpected charges for services beyond what is covered, or for service that falls short (but must still be paid for). This can be a significant downside risk for a buyer and can result in a painful re-negotiation.

Smart buyers use their PMO to aggressively manage the timeline to closing. There may be hundreds or even thousands of individual tasks to be performed, and an experienced, dedicated team to drive them forward makes a real difference.  This can pay dividends in vetting timelines, developing TSAs, and spotting issues early so as not to threaten the closing schedule. When an otherwise good deal falls behind, it can become a bad deal very quickly.

A detailed value creation plan is an important ingredient in making the acquisition successful. These are not all about headcount reduction. Looking for opportunities to grow revenue, achieve procurement savings, and make other operational changes, can all accrue to the benefit of a buyer. Opportunities will certainly be found during due diligence, but others can be found in the sign-to close phase if one is paying attention.

The result is a blueprint for action that begins on the first day of ownership.

The roadblocks: A short list for buyers

Information technology.  Many buyers inherit multiple ERP systems and hundreds of IT applications, some redundant or unneeded. Multiple ERPs are the most troublesome and replacing them with a single system is always expensive and disruptive. Evaluating alternative solutions is extremely important when assessing when and how TSAs for these types of systems are exited. Pick an advisor that is not trying to sell a big implementation project or seem laser-focused on one system that coincidentally is a favorite of their organization. It is not unusual for the IT TSA to be in place for 12 to 18 months, making it a major decision for the new organization.

Treasury, cash management and cash forecasting. Most carve-outs come from a seller with centralized treasury functions, meaning most buyers must build this critical function from scratch and make it a Day 1 requirement. Newly built treasury functions are often by definition led by new hires. This adds risk and inefficiency. Beginning immediately after signing is important.

Management may not be up to the task of operating in a stand-alone highly leveraged environment. If this is the case, make solving it part of the first 100-day plan. Problems like this do not improve with age.

‘Juice’ for both parties

Carve-outs done right can make a break-up a “win-win” and offer outsized value to both buyers and sellers.  Done wrong, they can be an unhappy experience for everyone. Both buyers and sellers should go into a carve-out with their eyes wide open and insist upon careful preparation followed by laser-focused execution from their experienced teams. When a carve-out is done right, the juice is worth the squeeze for everyone.

AlixPartners has global teams that can help companies with carve-outs for both buyers and sellers. Learn more about our practice groups below.

Mergers and Acquisitions

Turnaround and Restructuring