In an article titled, Carve Out Due Diligence, a portfolio company of yours announced the pending corporate action. The article interested you because you had never heard of a carve out or what it takes to complete such a transaction. Hungry for more data and searching Event Driven Daily, this is what you learn …
Carve Out Due Diligence: What Does It Mean?
What carve out due diligence means is the analytical process of conducting a thorough assessment of the quantitative and qualitative components of a company’s planned separation strategy. A carve out is a business transaction where a company separates, through a sale or spin-off, a portion of its existing operation or a subsidiary to form an independently operated business.
Carve Out Due Diligence: To add context to this financial investigative process, we will examine financial, operational, and legal due diligence, as well as tax, commercial, human resource, and IT systems due diligence. This is the essence of the carve out transaction and is performed to ensure the carve out entity is accurately valued, sufficient assets and corresponding liabilities are transferred and identified risks are manageable.
Financial Due Diligence – The carve out entity’s financial statements and supporting documentation are analyzed to assess its historical profitability performance and future projections. This process is necessary for accurate revenue and liabilities allocation between the parent company and the carve out entity.
Operational Due Diligence – Evaluating the carve out entity’s production process, IT systems and infrastructure, supply chain management, and human resources can determine and increase the entity’s success probability of functioning independently.
Legal Due Diligence – The carve out legal diligence process ensures there are no legal obstacles and hidden off-balance sheet liabilities. Contract reviews, coupled with third-party corroborative documentation, regulatory compliance verification, up-to-date intellectual property filings, and any ongoing litigation are continually scrutinized.
Tax Due Diligence – Current carve out entity tax records and any deferred obligations are analyzed. Understanding the present implications assists in the planning for favorable tax treatment going forward.
Carve Out Due Diligence: This is the underlying analysis a successful carve out transaction is built upon.
Commercial Due Diligence – The process analyzes the market climate, the entity’s client relationships, marketing and sales channels, and competitive landscape. Understanding these oscillating macro and micro economic determinants positions the entity to effectively manage its growth initiatives and navigate economic downturns.
Human Resource Due Diligence – Assessments are performed on key personnel, compensation structure, employment agreements, pension current distributions, and post obligations to ensure maximum talent retention during a smooth transition.
IT Systems Due Diligence – Reviewing the retrofits and upgrade necessities of the carve out IT infrastructure is a foundational part of the due diligence process. An up-to-date, superbly functioning integrated system is paramount to the entity’s independent success.
Carve Out Due Diligence: The objective of carve out due diligence is to perform a comprehensive analysis and gain a thorough understanding of the entity as a standalone business. Identifiable risks and known challenges are planned for and the transaction is structured to yield maximum long-term value with minimal disruptions and capitalize on favorable tax treatment.
