Selling Well - key lessons learnt when carving out a business

by Richard Jones Director, Capital Markets, Accounting Advisory & Structuring, PwC United Kingdom

Email +44 (0)7841 495 119

There has been a steady stream of high profile carve-outs in recent years. Companies have sold or spun-off non-core assets in response to changing market conditions and pressure from investors. 

I have advised on many carve-out deals over the years and have noted several critical factors to a successful sell-side deal. Most companies will focus on some of these areas, but real value comes from ensuring that all are considered.

Focus on your exit story & value

Selling a business is not as easy as buying one. The most successful clients that I have worked with over the years have developed a compelling exit story early in the process. This enabled them to set clear value expectations and ensure that their team were aligned in evidencing and selling that story. With those deals, it really felt as though the messaging was consistent throughout the process and that everybody was “singing from the same hymn sheet”.

Your exit story must convey that the deal is good value for both existing shareholders and for prospective buyers. Identifying value creation opportunities in revenue growth, cost savings and tax planning are all important parts of the story.

Understand, quantify & validate value creation opportunities

Your exit story will be thoroughly diligenced and will therefore need to stand up to a high level of scrutiny. Understanding, quantifying and validating the ongoing stand-alone cost base of the business post-separation is critical to maximising value. Focussing on pre-deal performance improvement and identifying upsides provides an important launchpad for the sale.

We spent many months working with one client supporting them in evidencing key EBITDA improvements from both the standalone operating model and additional value creation initiatives. This ensured that these uplifts would stand up to the rigours of diligence and were priced into deal value by private equity buyers, reducing their ability to apply contingencies. This resulted in a significant uplift in equity value and real value for shareholders.

Are you ready?

Take the risk out of the back end of the process by performing a thorough exit readiness assessment up front. Successful sellers identify key issues early on, and set out clear plans to remediate those issues. Ensuring that you have a clear road map means that when you do push the button to initiate the exit you can do that quickly and efficiently, and avoiding difficult questions from bidders.

Anticipate and focus on buyers’ financing and reporting needs

Anticipate the financing and reporting needs of your buyer pool. Think through:

  • Are your buyers listed and do they have public reporting needs?
  • Do they require IFRS financial statements?
  • Do they require finance for the deal? Are they raising public debt?
  • What other regulatory or financial information might they need?

Due to the availability of relatively cheap debt financing, we are seeing more and more buyers, particularly private equity, raise funds via the issuance of high yield bonds. This requires audited IFRS carve-out financial statements, which will need to be planned, prepared and audited early in the process.

Be flexible. Be agile.

In my experience, in the most successful carve-out deals, clients have ensured that they have a robust data extraction methodology and a data-driven approach to building the financial information needed to support the deal. This allowed them to flex the deal perimeter quickly and accurately when brands or assets moved in or out of that perimeter to meet buyer demands. Do you have the financial and operational data that buyers require, and can you manipulate this data quickly?

Set up well defined governance and reporting structures

Treat each carve-out with the respect it deserves. This is a major transformational event across your business. Silo mentality has no place here. Align M&A, finance, legal, tax and HR teams and make sure that any inter-dependencies are fully understood. A critical success factor of most deals we are involved in is a dedicated PMO that brings all of these aspects together.

Don’t forget the day job!

Bidders or investors will largely base their price on the results of the carve-out business through the transaction period. Maintaining focus on the business during this period will help you avoid a potential dip in operational performance that may result from top talent being diverted away from the day job to work on the deal.

Don’t forget the rest of your business!

Take the opportunity to make other existing operations more efficient following the separation. Spend time focussing on key value drivers, including stranded costs, trailing liabilities and tax implications. These post-deal separation plans will need to be effectively delivered and, critically, communicated to stakeholders in a timely and well thought through manner.

If this is on your agenda, then please do get in touch. I would be delighted to discuss and share my experiences. 

What do you think are the top things to consider when carving out a business? Comment below or get in touch on LinkedIn.

by Richard Jones Director, Capital Markets, Accounting Advisory & Structuring, PwC United Kingdom

Email +44 (0)7841 495 119