PE carve-outs: How to overcome the financial challenges

The rationale behind carving out a business is to create or unlock value. However, separation can present as many challenges as opportunities for PE firms. The anticipated value will not be realised if the newly formed company lacks the infrastructure, resources, and talent to operate effectively and independently.

In this blog post, we introduce the fractional role of an experienced CFO to manage the financial process and help PE firms mitigate the unique risks of this type of transaction.

Challenge #1 Determining the fair value of the carved-out entity

PE-backed companies often have complex capital structures. An unbiased and independent CFO can help determine the business’ true value with meticulous financial analysis, which will also consider historical performance, market dynamics, and growth prospects.

Challenge #2 Establishing independent financial reporting

Separating the financial reporting and auditing processes for the carved-out entity needs the experience, judgement and careful planning of a CFO who has undertaken this before. Independent financial reporting systems, processes and procedures must be established together with robust financial controls and reporting mechanisms before the carved-out entity can establish independence from the parent company.

Challenge #3 Financial disentanglement of the carved-out entity from the parent

A seasoned CFO can untangle the shared assets, liabilities, revenues, and expenses between the carved-out entity and the parent company. This is a complex task, often involving comprehensive analysis of interdependencies, including intercompany transactions and transfer pricing considerations, to ensure the success of the process.

Challenge #4 Evaluating capital structure and debt

Managing the capital structure and debt arrangements of the carved-out entity is crucial to assessing the impact of the carve-out on existing debt agreements and the ability to secure new financing. A CFO experienced in this area can assess the business’ current capital structure, renegotiate debt terms or secure new financing to optimise the financial structure of the carved-out entity.

Challenge #5 Delivering financial forecasting and projections

Developing accurate financial projections for the carved-out entity is crucial for assessing its future performance and attracting future potential buyers or investment. An iFD can implement robust financial forecasting to demonstrate value and growth potential and support effective working capital management.

Challenge #6 Identifying HR and tax implications

The carve-out process has significant HR and tax implications for both the carved-out entity and the parent company. By having effective HR and tax planning strategies, the parent company can evaluate potential tax exposures, optimise tax structures, and ensure compliance with applicable tax regulations. By doing this, a CFO can help PE-backed companies minimise tax risks and maximise tax benefits during the carve-out process.

Challenge #7 Managing transaction costs

In the private equity carve-out process, managing transaction costs is a critical challenge. This includes legal fees, due diligence, and regulatory expenses. iFD can provide valuable support by offering cost-effective due diligence solutions, expert guidance, and strategic insights to help private equity firms minimise transaction costs while maximising returns.

Our experienced part-time FDs and CFOs understand the complexities involved in this demanding process and will provide tailored solutions. From valuation to financial reporting, disentanglement to tax planning, and capital structure to working capital management, specialists like iFD can guide PE-backed companies throughout the carve-out journey.