Maximising return from divestment

Sometimes it makes strategic sense to sell, ‘carve out’ or divest parts of a group of companies or a division within a company. There are many reasons for this including wanting to liquidate cash for further investment within the business, a change of strategy due to market forces or a product or service no longer fits the current portfolio. But how do you ensure you maximise your return from your divestment?

 

Carve-outs are a growing feature of the current deal market. They are, by their very nature, more complex than the sale of a fully standalone business. We have found that many of the more obvious carve outs have been performed over the past few years. Failure to evaluate the costs and challenges of separation and prepare clear terms for transition can risk under-pricing a deal, leaving buyers and vendors exposed to significant unforeseen costs and operational issues.

 

People are key

Ensuring the correct employees transfer as part of the deal is often a complex and timely procedure. This will impact the ongoing cost base. Transfer of Undertakings (Protection of Employment) regulations (TUPE), or equivalent in other territories, must be adhered to along with the relevant consultation process. The strategy for transfer of pension schemes will also need to be decided at an early stage, given consultation periods.

 

Technology drives cost and timescale

Ensuring business continuity of the separated entity will likely revolve around technology and IT systems and gaininga full understanding of which systems are shared with the parent. Analysing one off costs to establish either a standalone IT environment or integrating with current buyer operations is needed at an early stage. It’s important to agree these up front and decide on who will pay for what.

Remember there will probably be an element of stranded costs for the parent. Contract novation or setting up new licenses and agreements can be time consuming and are usually required before completion. Start negotiations with key vendors as soon as possible.

 

Transitional arrangements secure business continuity

When the carved out entity is using parent office space and/or facilities, you’ll need to provide enough space from day one for operations to continue. This may be part of a transitional service agreement (TSA) or involve sharing space within current owned assets or new facilities. Other specific assets and liabilities that are being divested will also need to be identified.

 

The scope, duration, service levels and cost of any TSAs should form part of the Sale and Purchase Agreement (SPA) or other transaction documentation. In addition any Long Term Agreements should be agreed at this stage, especially where this will impact deal value or long term revenue. The sooner any TSAs can be terminated the better, as the longer the TSA continues the higher dual running costs will be, control will be reduced for the new owner and it will be less efficient to operate as standalone entity.

 

Some areas of operations will be necessary to be standalone from day one (i.e. with no reliance on TSAs). These will vary deal by deal, however common examples would include the entity having its own insurance policies, having standalone treasury and legal functions, full control of cash management and bank accounts, ensuring any third party contract change of control has been enacted and some tax considerations.  

 

What challenges have you encountered during a carve out? How did you overcome them? What advice would you give yourself if you could go back to the start?

 

Share your thoughts below or contact us to set up a meeting to discuss things more confidentially here

 

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Andrew Broad | Divestment Specialist
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