Whether the objective is to expand into new markets, fill gaps in a product portfolio, or gain quick access to revenue, customers, operational capacity, and talent, buying a carve-out can create significant value for the acquirer. It also comes with some tricky caveats that can put that value at risk.

Buyers can set themselves up for success by clearly understanding the common obstacles. Our recent survey of global M&A practitioners determined that cultural differences and process and technology issues are the biggest challenges in integrating carve-outs—followed by negotiating transition service agreements (TSAs) and talent issues as well as challenges with the perimeter of the carve-out. These all are issues that need to be addressed up front (see Figure 1).

Figure 1

Too many buyers fail to acknowledge a fundamental rule for success: Delivering full value from carve-outs requires more than simply getting to Day 1. Importantly, it also means using the carve-out integration as an opportunity to change the business and unlock its full potential.

Consider the situation in which a company bought a carve-out with a great strategic fit. Getting to Day 1 meant separating and integrating numerous legal entities across more than 15 countries (with hundreds of employees in these entities). The buyer had to plan a deferred close for more than 40 countries that were not ready to cut over on Day 1 as well as navigate entanglements in the most important lead-to-cash process.

But even as it completed this massive effort, the buyer kept a laser focus on a crucial strategic decision—namely, ensuring the optimal go-to-market model in each country. It used the sign-to-close period to carefully evaluate where to maintain a direct salesforce vs. a channel partner, which enabled it to plan for the appropriate go-to-market model for its strategy. It set the buyer up for long-term success.

Management knew the importance of both planning for Day 1 and long-term value creation. Indeed, the most successful carve-out acquisitions start with due diligence that identifies both the carve-out–specific elements and value creation plan required to underwrite the deal. They develop a solid integration thesis linked to the essential value drivers and carve-out components.

Here’s our advice for buyers to address these issues.

Use cutting-edge diligence to assess the carve-out situation (e.g., perimeter, entanglements, standalone costs) and its impact on value creation. In a carve-out acquisition, it is not always immediately clear what you’re getting. So, diligence is the crucial moment to dig deep into the people, systems, and assets (including contracts, IP, etc.)—and identify where the new company will either need TSAs or a build-out/integration plan for Day 1. As an example, diligence should uncover commercial implications of the carve-out/perimeter, such as which countries may require a new distributor or building a salesforce as well as any areas in which critical comingled contracts (customer or supplier) create risk.

Acquirers now are using AI and other proprietary tools to navigate data rooms, test early TSA coverage areas, and quickly apply benchmarks to get accurate standalone costs. The second way cutting-edge diligence differs is that it’s tied to the deal thesis. It will articulate where value creation can be accelerated vs. where it might be at risk—as well as further areas to test with access to more granular data.

Accelerate process and systems decisions. In a carve-out, the business must change how it operates on Day 1, which requires extra planning to make sure that critical interactions continue without disruption—namely, that customers can be invoiced, that employees get paid, and that products are available. Ensuring continuity requires decisions about how cross-functional processes such as order-to-cash will operate and what systems will support them. In addition, there are multiple decisions on which conveyed or TSA-ed systems to keep, clone, build new, integrate, or retire.

Plan and utilize TSAs strategically. While TSAs are an important mechanism for continuity on Day 1, buyers and sellers have different motivations for a TSA’s scope and duration. Instead of operating on general rules of thumb like, “We need longer TSAs” or “We need to negotiate the best possible service,” buyers should look at TSAs as a bridge to achieve the integration priorities. Are you fully integrating into a new enterprise resource planning system and therefore need longer systems TSAs? Where do you plan to outsource activities, and can you operate with shorter (or no) TSAs? Other important caveats: Ensure that functional systems and processes are operational with TSAs and people ready and that sufficient planning goes into TSA exits.

Set the tone on people and culture. Carve-outs present additional people integration challenges compared with traditional integrations. The buyer often has limited visibility into the talent and the capabilities needed to operate. In addition, carve-out employees may feel undervalued, and sellers may be reluctant to let the buyer interact with them.

Top carve-out acquirers invest early to set the tone with both the seller and the carve-out. They work to align early on leadership that can help identify early critical talent, and they establish metrics/parameters around talent distribution and movement before the deal close. They also establish a clear superstructure early on and work with the executive team to create a compelling vision for the combined company. As the deal progresses, they activate leadership by reaching out to ensure that key talent feel valued and excited about their role in the future company.

Plan for and execute Day 1 in a way that mitigates risk and prepares for the future state. Because carve-outs are so complex, many companies see a successful Day 1 as the mark of victory. But the best carve-out acquirers understand that a smooth cutover on Day 1 is just the beginning. These companies deliver a smooth Day 1 while simultaneously preparing the business for cutovers at TSA exits—all aligned with detailed plans for delivering synergies and future growth.

Carve-outs can be attractive acquisitions, and they represent unique opportunities for a buyer. However, there’s a big caveat: Unlike a full company acquisition, the business can break on Day 1 if things are not planned and managed well.

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