Beyond the Sale: Evaluating Carve Out Transactions and Operational Considerations

by | Jan 22, 2024 | Insight-Post, PKF Texas - The Entrepreneur's Playbook®

Chris Hatten, CPA, CVA, CM&AA, examines carve-out modeling in this episode of the PKF Texas – The Entrepreneur’s Playbook®. Explore the essential modeling components for carve-out transactions, from financial considerations to operational adjustments. Learn how modeling plays a crucial role in determining the ultimate purchase price. Stay informed and empowered with practical insights for strategic decision-making in business divestitures.

Jen: This is the PKF Texas Entrepreneur’s Playbook, I’m Jen Lemanski, and I’m back once again with Chris Hatten one of the Approachable Advisors® on our transaction advisory services team. Chris, welcome back to the Playbook.

Chris: Thanks, Jen.

Jen: So, we always get you here talking about buying and selling businesses. What we haven’t really talked about yet is just do sellers typically sell a whole business, or are there parts that they can sell off?

Chris: So, we’ve touched on usually when a company sells the entire business. But a lot of times what happens is they will sell off, either they can sell individual assets which isn’t overly complicated, or they could sell off what most people refer to as a division. And so, then when those transactions do come about, that’s more in line with what we would call a carve out transaction because essentially you are carving out a chunk of that otherwise larger entity. And businesses will do that for several reasons. Sometimes, you always hear the term a lot of time in the news or Yahoo Finance about the selling off non-core assets. And so that’s what this carve out would entail. Sometimes it’s for restructuring purposes or even sometimes it’s because they might have an entity that falls under parent company umbrella, but really, they’re kind of an outlier maybe from a operational standpoint.

And so, they want to spin that off and run it as if it’s own separate business. They might set up its own separate board and all that kind of stuff. Transactions are similar to what we’ve talked about in the past about normally quality of earnings perspective. And so, you’re still going to go through and you’re looking forward for the normalization of earnings taken out the non-recurring expenses, but you do have to look at it from a different lens. These are operations of what was a larger entity before. And so, a lot of times those companies had their own management, your typical C-suite, let’s just say that, IT, payroll, that kind of stuff. And so, you need to look at that from that perspective because you might have a private equity company that is buying this entity to run as its own portfolio company. And so, they’re going to have to go in and set up their own management company or management entity, I should say, CEO maybe VP Finance, CFO, depending on how big this entity is. But then also, payroll.

Jen: Employees want to get paid.

Chris: They do want to get paid, they want to get paid timely. But from a payroll perspective, a lot of these functions we’re taken care of, we’ll say at the corporate level before. And sometimes the division might have been what we call burdened with some of these expenses. And so, they might have an administrative charge for the parent company doing this, but now this is something that they’ve got to look at individually. And so, maybe they take it to one of the third-party payroll service providers that are out there. Or it may get tucked into an existing company, and so they’ve already got payroll set up. And then IT obviously that’s really important these days. But from an accounting perspective you also have to take a look at, well, are they going to, because parent company’s going to get them out of their account system.

Jen: Yeah. They’re like, yep, you’re out. We sold you, you’re good.

Chris: Yeah. And they got to stand on their own. So, now it’s a function of do they have to go in and get QuickBooks set up, or do they need something more robust like NetSuite, which is also going to have a look longer runtime to be able to get set up and running. And then also what I was talking about from a normalization earning, but then also looking for the one-off expenses that are sometimes different because they were under a parent company. One time we had an entity that was part of a grant, a larger multi-billion dollar revenue company. So, a lot of what they did was from the conferences and branding and all that kind of perspective. And so, what we were tasked with was like taking a look at how much that spend was and kind of what that might be on a go forward basis because then all that filters down to the bottom line pretty quickly. But then also, are they going to need their own operating facility? Is this something that private equity or whomever the, the acquirer is, is going to already has a facility set up that they’re going to combine the operations? Or is this something that they’re going to have to go out and find a new lease for? And again, they’re going to sit there and bake that into their model to determine whether what that ultimate purchase price is going to be. So, there’s a lot that goes into these carve out transactions. But like I said earlier, you do have to take a look at them from a different lens because, again, how they were involved with those larger parent entities before. And, and we saw a lot of this back during the last downturn in the energy markets, some of the companies BMP companies, the larger oil field service companies were like I would say that the non-core assets that they were selling off and some of our clients were the beneficiary of that. But there is a lot more work that goes into these, and you do have to take a look at them from a different perspective.

Jen: Perfect. Well, we’ll get you back to talk a little bit more about some other transaction related items. Sound good?

Chris: Of course.

Jen: Awesome. This has been another Thought Leader production, brought to you by PKF – Texas the Entrepreneur’s Playbook. For more information about this and other topics, visit Tune in next week for another chapter.

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