BZ | The Art of the Corporate Carve Out

Jan 2024

Originally posted by BZ on December 19, 2023.

Corporate carve outs have returned in strength amidst a slower mergers and acquisitions market as they are a strategic growth tool for turbulent times.

While corporate carve outs come with some challenges, the value they add is compelling. When pursuing a corporate carve out, there are several things to consider, such as if divesting aligns with the current parent company strategy or if the business can operate on its own.

“Having clarity upfront on whether the entity can operate independently outside the larger business streamlines the process, but difficulties arise when businesses try to carve out a business line that lacks a clear standalone structure,” Sophie Pollitt, Director in Lincoln’s Capital Advisory Group, commented. “This situation brings additional costs and limited information, making the diligence process less comprehensive, requiring individuals to take a view on various points.”

In corporate carve outs, buyers have strategic advantages, particularly when likened to leveraged buyouts, as they can utilize a greater understanding of non-core assets (compared to sellers).

While carve outs are an attractive option amidst uncertainty, macroeconomic challenges can have an impact on this market.

“I believe the main challenge in today’s market, given the current interest rates, is debt serviceability. If you don’t have a firm understanding of the business’ cash flows during a carve-out, it can be challenging,” Sophie said. “Cash flow considerations are crucial in today’s business environment. When dealing with a standalone business with a proven history, it’s easier to assess cash flows. However, during a carve-out, when you need to make assumptions, it often leads to a more conservative approach in structuring the deal.”

Asset-based lending is a useful financing that can support corporate carve out transactions in a challenging environment.

View additional insights in the original article.