Carve-outs are in vogue and it is not only the current pandemic that will lead to this continuation. Companies are forced to find strategies to implement the best possible structured processes and to position products and solutions sustainably. According to the latest PwC Deals study , 72% of respondents rate carve-outs as important in the future.
Efficiency and cost considerations as well as greater agility in the face of unforeseeable economic events and market uncertainties are common objectives that speak in favor of separating certain business units.
Success factors in the carve out
When carrying out carve outs, the main aim is to generate the highest possible sales revenue. The decisive factor here is the degree of existing dependencies and interdependence between the transferring unit and the part to be spun off. The future legally independent unit will then be subject to separate reporting, the business to be transferred must be delineated and resources required for independence must be identified. In many cases, this applies to commercial processes that may be centrally incumbent on a shared service center.
In order to secure the processes until the spin-off becomes independent and to ensure that the transition as smoothly as possible in the course of the carve-out, sellers and buyers conclude so-called Transitional Service Agreements (TSAs). These regulate which processes will initially continue to be made available by the seller.
Determining the TSAs is often lengthy and time-consuming. The buyer side in particular is difficult to formulate scope of services or service levels in detail if processes have been provided centrally. Service levels may have yet to be determined. This offers great potential for conflicts. The divesting business unit must continue to tie up resources for the spin-off, and the spun-off unit will continue to be dependent on operations and embedding in its own structures. In many cases, this state of affairs lasts for a long time beyond the day of the transfer of ownership (closing).
The PwC Deals study shows that the TSA duration is not optimal for the purchase price for almost every second carve-out project. TSAs between 6 and 12 months or longer than 18 months reduce the success of carve-out projects.
TSAs are comparable in key points to agreements in the context of outsourcing business processes to external service partners.
Basically, and especially in the run-up to a carve-out, it can make economic sense to outsource commercial processes in whole or in part to external service providers.
46% of respondents in the PwC Deals study are already creating independent structures for the spun-off entity before the buyer has been determined. 40-50 percent of decision-makers are already implementing this for the Finance and Controlling, Human Resources and IT functions.
Business Process Outsourcing is a promising strategy for this.
Smart carve out through BPO
With the handover of commercial processes, such as accounting or payroll accounting, to specialized service providers, carve-out transactions gain stability. The processes for the independent unit are transferred from the selling part of the company into independent process and system landscapes. From the very beginning, the outsourcing partner builds lean processes away from the complexity of the group of companies and operates them at the time of closing. The BPO contract is transferred to the buyer.
The outsourcing approach opens up the opportunity to reduce expenses, project duration and resource commitment. In addition, the transitional restrictions can be kept as short as necessary with good preparation.
Advantages of outsourcing in carve outs:
- External service providers offer proven solutions and know-how on demand. IT, process and technical expertise are provided in a bundled manner. When it comes to process takeovers, they are one step ahead of their own IT or specialist departments, as transaction projects are part of their daily business.
- BPO reduces complexity. This has positive effects on the transaction value.
- The selling entity needs to commit fewer resources to the carve-out process. Both in preparation and after closing. The outsourcing partner is responsible for the ongoing operational safeguarding of the commercial business processes. This means that the seller no longer has to commit resources to the buyer for services after closing and can concentrate on his business.
- In the case of the BPO, the process of unbundling takes place before closing. This puts the seller in a position to maintain control over the process.
- The effort for lengthy TSAs is reduced to a minimum or can even be eliminated.
- The buyer is independent more quickly. The integration of the spun-off unit into the existing corporate structure can be carried out independently from the closing onwards without dependencies on the seller.
- Companies that frequently carry out carve-outs can rely on a proven solution.
Business Process Outsourcing creates a situation that benefits both sides. Sellers and buyers can implement the spin-off more quickly. The effort involved in preparation and implementation can be reduced.
Outsourcing and good interaction between the acting parties creates the basis for companies to be more agile in dealing with market changes.
Carve Out Success – Accounting, Payroll and IT Ready to Go with BPO
As markets ease after the pandemic, many companies will be reorganized. Carve-outs will be important and solutions will be needed that enable a smart transaction process.
The early organization of commercial processes with specialized BPO service partners is an effective investment in limiting complexity. The expertise and experience of the external BPO provider help the transferring company to find the optimal solution for the processes and IT landscapes involved with regard to the transaction project.
The result is an early independence of the spun-off business unit, which makes a lasting contribution to the success of divisions.
What experiences have you had in carve-out processes? Do you see the use of BPO in the commercial sector as an interesting option in the course of a carve-out?
Image Credit: Unsplash, Photographer: Herbert Goetsch
