Carve-Out
A carve-out is the sale of part of a company — a division, a product line, a subsidiary — that has to be separated from the rest before or as it is sold, because it shares systems, staff, contracts or licences with what the seller keeps. The separation work, not the negotiation, is what makes carve-outs slow and expensive.
- Also known as
- Carve-out transaction, Divisional sale, Business unit disposal
- Used at
- when a group sells a business unit rather than the whole company
- Structure
- an asset sale, or a hive-down into a new subsidiary whose shares are then sold
- The hard part
- transitional services, shared contracts, shared licences, and the standalone cost base
- Typical transitional services agreement
- 6–24 months, at cost plus a margin
- Parties
- the selling group, the buyer, and the unit's management, who often move with it
How a carve-out works in practice
A group that wants to sell its payments division finds that the division does not exist as a company. Its staff are employed by the group, its servers run in the group's data centre, its bank accounts are the group's, its acquiring is done under the group's licence, and its largest contracts are group contracts with the division as one schedule. Selling it means first deciding what it is — the perimeter — and then building the pieces that make it standalone.
Most carve-outs use a hive-down: the group creates a new subsidiary, transfers the perimeter assets, contracts and staff into it, and sells the shares of that subsidiary. The buyer gets a company; the seller gets to keep everything outside the perimeter. What cannot be transferred by completion is covered by a transitional services agreement, under which the seller keeps running payroll, IT, treasury or compliance for the unit for a period, at a price, while the buyer builds or buys its own.
For a licensed fintech unit the licence is the constraint that shapes everything else. If the authorisation is held by the parent, the carved-out unit needs its own before it can trade alone; the process often runs a year, and the deal is signed conditional on it, with the parent providing regulated services under an agency arrangement in between. The buyer's diligence focuses on the standalone cost base — what the unit will cost to run once the group's shared services are charged at market rates rather than allocated — because the divisional profit in the seller's accounts rarely survives that adjustment.
Example
A bank sells its merchant-acquiring division to a private equity buyer for €200m. The division is hived down into a new company over five months: 310 employees transfer, 4,100 merchant contracts are novated, and the acquiring licence is applied for in the new company's name. The sale completes conditional on the licence, which takes eleven months, with the bank acting as principal in the meantime. A transitional services agreement runs for 18 months at €900,000 a month for IT, treasury and compliance. The buyer's model shows standalone EBITDA of €14m against the €19m reported divisionally, once shared costs are priced at market.
Common mistakes
- Pricing the unit on divisional profit that assumes the group's shared services are free. - A perimeter decided late, so that every week a new contract or employee turns out to be on the wrong side. - A transitional services agreement too short for the buyer to replace what it covers. - Assuming the licence can be split; it cannot, and a new one takes a year. - Forgetting the people: a division's managers may not want to leave the group, and without them there is no business.