In the context of restructuring, divestment, or strategic repositioning, carve-outs are common but complex operations. A carve-out involves separating a business unit or activity from a parent company to create an independent entity. But beyond the legal split, it raises numerous operational, financial, and accounting challenges.

What is a carve-out?

Carve-outs can take several forms:

• Spin-off or subsidiary creation: The activity remains within the group, but as a legally autonomous entity
• Divestiture: A sale of an asset, group of assets, or business unit to a third party (investor or competitor)
• IPO (Initial Public Offering): The activity becomes a publicly traded company

Typical goals include improving valuation, refocusing on core business, or complying with regulatory requirements

Strategic, financial & accounting issues

Implementing a carve-out is a multi-dimensional challenge, with implications across three major areas:

1. Strategic & operational challenges

One of the first steps is clearly defining the perimeter of the carve-out: which assets, liabilities, contracts, teams, and resources will be transferred? This must be precisely scoped to avoid disputes or surprises. Ensuring operational continuity is also critical : the transition should not disrupt production, customer relationships, or internal processes. Moreover, human resource management is another key concern, namely how staff will be transferred or if new reporting lines or reorganizations are required.

 

 

 

 

 

 

 

 

2. Financial challenges

A carve-out has significant financial implications:

1. The business unit must be properly valued to reflect its standalone performance
2. Key financial indicators (EBITDA, leverage ratios, etc.) will shift post-separation, potentially affecting stakeholder confidence
3. Separation costs, including legal fees, IT restructuring, and new accounting infrastructure, must be anticipated and budgeted to avoid eroding deal value

3. Accounting challenges

From an accounting perspective, preparing standalone financials for the carved-out entity is often complex:

• Combined financial statements may be required
• Data may need to be extracted from multiple systems
• The reliability and completeness of historical records must be assured
• ERP systems may require configuration changes or even replacement

Additionally, accounting teams, already stretched by closing cycles and regulatory deadlines, may not have the bandwidth to manage such a project without reinforcement.

 

 

 

 

 

 

 

 

 

 

 

The importance of documenting accounting separation methods

To ensure the reliability of reported figures and reassure third parties (investors, buyers, auditors, regulators), it is critical to formally document the accounting separation approach:

• What principles were applied?
• Which assumptions and adjustments were made to produce standalone statements?
• How was performance presented transparently and fairly?

A robust documentation framework enhances clarity, improves auditability, and strengthens negotiation leverage.

Conclusion

A carve-out is a powerful strategic tool to unlock value, but it carries risks and hidden costs if poorly managed. Successful execution requires careful planning, technical precision, and a dedicated project team.

At Yérima Advisory, we guide clients through every phase of a carve-out, from strategy to exécution, ensuring a smooth transition and a value-creating transaction.

 

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