In this summary, we will cover:

  • What divestment and carve-out is.
  • The key questions you should ask if you are planning a divestiture or a carve-out.
  • How to prepare for a smooth divestment and carve-out with the right answers.

Takeaways

  • Divestment is the process of selling an investment, a property, an equipment or a business subsidiary while a carve-out is the divestiture of a business unit from the parent organization.
  • The management of a company needs to plan accordingly when deciding on a divestment and carve-out. The questions that need to be addressed should touch on assets, employees, location, and the timing of the carve-out.
  • The ICT and the Enterprise Resources Management systems need to be discussed and planned out in detail before the process is finalized. This is because these systems cannot be shared between two different organizations, and the carved-out business unit needs its own systems for easy running of its business.
  • The timing of the carve-out process can be prior to the sale or be done simultaneously if done prior, the management of the company does not need to consult the buyer, but it will bear all the costs. If done simultaneously, the management will need to consult the buyer, but the costs will be shared.
  • For an easier process, seeking advice from experts such as financial experts, accountants, and legal people will go along way.

Summary

Divestment also referred to as divestiture, is the process of selling an investment, a property, an equipment or a business subsidiary. It is the opposite of investment. A carve-out, on the other hand, is the divestiture of a business unit from the parent organization. These two processes happen as an organization grows and starts facing challenges. The competition might stiffen or some units within the organization can stagnate and drag the whole organization’s performance down. The company could be changing its strategy. Whatever the reason might be, one of the solutions will be divestment.

Simple as divestment sounds, it could be difficult to implement. This is because many business units within an organization are integrated so as to save costs e.g. administrative costs, personnel costs just to name a few. Therefore, it is important for managers to first figure out what business unit will be sold. Once this is done, that business unit has to be separated from the rest of the organization- carving-out. When planning a carve-out, it is important for the management to answer the below questions;

  • Employees- do the employees of the carve-out provide any services to the parent company or other business units? What will the payroll and HR processes look like after the carve-out process?
  • Assets- do the assets in the carve-out business unit matter to the rest of the business units or the parent company? Are they interlinked in any way? If yes, what assets are these?
  • Supply chain process- does the carved-out business unit rely on the parent organization or any other business units for its supplies?
  • Services- are there any services or resources that the carve-out business receives from the parent organization or other business units? Will these services remain with these organizations, be transferred to the carve-out business or will the company continue offering services to the buyer?
  • Completion of the carve-out process- will it be completed before or after the sale of the business unit?

Once these questions are out, the management will, of course, get to answering them. Below is the kind of answers you should be looking for;

Employees- first, the management need to determine which employees are part of the carve-out business unit. A challenge could ensue where an employee or some employees are critical to the other business units or the parent company. If this is the case, then the management will need to determine which employee/s is/are critical to the operations of both business operations. The next step will be to determine if the loss of such an employee/s will interrupt the operations of the business.

The management should also ensure there are no conflicts of interest, or the employees of the carved-out business have divided loyalty. These employees should keep serving the current employer with no limitation while the processing is being completed. This means that the management, too, should keep treating them well, just like the rest of the employees.

Assets- subsidiaries always have their own assets, but there might be assets that are critical to the operations of the parent company, too. In such a situation, the management needs to identify these assets when the carve-out process is planned. Once identified, the management should decide on how to allocate these assets. If there are any transition services e.g. administrative or personnel among others, contracts, supplies, procurement or license agreements, they, too, need to be allocated accordingly.

When deciding on the allocation of assets, Intellectual Property ownership or licenses should not be forgotten. This is particularly a touchy subject because, on most occasions, the Intellectual Property will not belong to a single business unit but to the parent organization. The management needs to decide whether its Intellectual Property will be retained by the parent company or be licensed to the buy with or without limitations.

Real property- more often than not, business units are confined within the same property. If not, then they could be housed in a property that is owned by the parent company. In such situations, it is important for the management to decide whether the carved-out business unit will lease the property, sub-lease or move out entirely.

Information and Communications Technology (ICT) and Enterprise Resources Management (ERM)- one of the things that are difficult to transition or even “clone out” to a carved-out business are ERM services. These include accounting services, payroll, audit, procurement and employee management. The management needs to ensure that the carved-out business unit has the necessary ICT and ERM systems to make it on its own. The carved-out business unit will have to create its own payroll and employee management systems, as well as have its own ICT services.

Timing- when all factors are considered and planned accordingly, the next decision should be when the carve-out should take effect. It could be prior to the sale or be a simultaneous process. If the management settles on a prior timing, settling all the issues such as employees, assets, ICT, and ERP among others can be done without including investors in the process. This is good because it reduces the chances of the investors influencing any decisions made by the management. The only negative impact to this is that the parent company bears all the costs that ensue due to the carve-out process.

If, however, the management decides the carve-out process will be simultaneous with the sale, then the input of the investor or buyer of the carve-out will be needed. The costs of this process will also be shared between the company and the buyer. This has a negative impact in that the negotiations could be dragged on for long due to disagreements.

In conclusion, divestment and carve-out processes may seem like an easy way out for a struggling business. In practice, the process needs a lot of planning, dedication as well as resources. The management of any organization planning on divestment and carve-outs needs to allocate enough time and resources before beginning the process. For an easier time, the management can seek the services of a financial, accounting, and legal personnel’s when they are starting the process.

References

https://www.foley.com/tips-for-planning-a-carve-out-divestiture-04-26-2018/