Business Carve-Outs: Best Practices
Preparation & Messaging
- Structuring - identify potential issues, evaluate tax implications to help determine structure and engage advisors early to help in the process.
- Control messaging - establish a clear and consistent message to communicate the proposed transaction to existing stakeholders (business partners, employees, management and the broader public). This minimizes both external and internal stressors and unease.
- Clarify operational issues and entanglements – lay out what will be retained and what will be sold, including a detailed inventory of the operations and assets to be divested.
- Prepare a post-transaction representation of how both businesses will look after giving effect to the divestiture (to evaluate post-transaction operations, cash flows, cost structures and tax effects).
- Together, these steps will highlight the major decisions to be made and risks to be managed.
Transition services: ensure that critical functions remain in place during the transition of ownership
- Identify which areas the buyer will need transition services on day 1 post-acquisition
- Key negotiating points of a transition services agreement include the term of the agreement, the scope of services and the price to be charged for such services
- The seller will want to limit the time and scope of the transition as it can be costly and distracting from the seller’s ongoing business concerns
OVERVIEW OF CARVE-OUT TRANSACTION PHASES
- Define key selling points and, if necessary, prepare marketing materials (ie. the management presentation and information memorandum)
- Prepare confidentiality agreement
- If applicable, market the transaction and finalize buyer list
- Preliminary legal work gathering seller-side diligence and addressing any carve-out specific issues (ie. shared contracts, segregating assets, etc.)
- Prepare data room due diligence materials for proposed buyer(s) to review
Phase 2 - Initial Negotiations
- Arrange diligence visits and materials
- Coordinate responses to buyer questions
- Negotiate letter(s) of intent with finalist(s) and pick a buyer
Phase 2 - Negotiating the Deal
- Negotiate asset purchase and sale agreement and ancillary agreements
- Coordinate additional due diligence
- Execute definitive agreements
- Receive requisite approvals for the transaction
- Prepare for closing
Phase 4 - Closing
- Perform post-closing obligations and covenants (ie. obligations under a transition services agreement)
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