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5 Tips for a Carve-Out Transaction

Nov 16, 2020 Decorative image

The global pandemic put pressure on many organizations, requiring management teams to evaluate the most important components of an organization’s value proposition. Oftentimes, these evaluations shed light on certain segments within a business that may not be as profitable or strategic as they once were, causing the organization to consider investing and improving these segments, closing them down, or selling to a third party.

Five Tips for a Carve-Out Transaction

1. If an organization decides to sell a piece of its business in a carve-out transaction, it’s important to be very diligent in understanding exactly what will be transferring with the carve-out as well as who will be responsible for the transfer. Equally important is a solid understanding of what the surviving entity will look like going forward.

2. While due diligence is always a key part of the buyer’s process when making an acquisition, in a carve-out event due diligence becomes more critical. It requires a much deeper dive into the asset being sold as it is often not a clearly defined business. Alternately, traditional due diligence could result in overpaying for a carve-out asset or potentially have a negative impact on the new entity. Organizations should consider relying on qualified and experienced advisors to assist both the seller and buyer.

3. Evaluating what the seller’s risk profile may look like after a carve-out transaction is completed is extremely important. There could be surprises which negatively impact future operating results and performance of the company.

4. In a carve-out transaction, a representations and warranty insurance (RWI) policy becomes even more critical as there may be more unknowns and risks to the transaction. Incorporating an RWI strategy will help to reduce these risks.

5. Carve-out transactions typically require a transition team to facilitate migration out of the seller’s company and integration into the buyer’s company. Utilizing a risk manager who specializes in both commercial insurance and employee benefits is critical to the success of this team.

Carve-outs are a very specific type of mergers and acquisitions transaction with complex risk management issues. These transactions require additional diligence and thoughtfulness from both the seller and buyer.

Learn more about how we help companies like yours with a carve-out transaction.

The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions.

Joe Herman, SVP, Transactional Risk, Hylant M&A Transaction Solutions