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M&A and Transaction Solutions

5 Tips for a Carve-Out Transaction

A carve-out transaction is a very specific type of M&A deal with complex risk management issues. It requires extra diligence from the seller and buyer.

April 10, 2023

When management teams evaluate the most important components of their organization’s value proposition, often these evaluations shed light on business segments that may not be as profitable or strategic as they once were. The organization may consider investing and improving these segments, closing them down, or selling to a third party.

If they decide to sell—or “carve out”—a piece of the business, both sellers and buyers should understand that these special M&A transactions involve complex risks and should be approached carefully. Here are some tips to consider.

M&A Carve-Out Transaction Tips

1. If an organization decides to sell a piece of its business in a carve-out transaction, it’s important to be very diligent in understanding exactly what will be transferred with the carve-out as well as who will be responsible for the transfer. Equally important is a solid understanding of what the surviving entity will look like going forward.

2. While due diligence is always a key part of the buyer’s process when making an acquisition, in a carve-out event due diligence becomes more critical. It requires a much deeper dive into the asset being sold as it is often not a clearly defined business. Alternately, traditional due diligence could result in overpaying for a carve-out asset or potentially have a negative impact on the new entity. Organizations should consider relying on qualified and experienced advisors to assist both the seller and buyer.

3. Evaluating what the seller’s risk profile may look like after a carve-out transaction is completed is extremely important. There could be surprises that negatively impact future operating results and the performance of the company.

4. In a carve-out transaction, a representations and warranty insurance (RWI) policy becomes even more critical as there may be more unknowns and risks to the transaction. Incorporating an RWI strategy will help to reduce these risks.

5. Carve-out transactions typically require a transition team to facilitate migration out of the seller’s company and integration into the buyer’s company. Utilizing a risk manager who specializes in both commercial insurance and employee benefits is critical to the success of this team.

Learn More

Carve-outs are a very specific type of M&A transaction with complex risk management issues. These transactions require additional diligence and thoughtfulness from both the seller and buyer.

Learn more about how we help companies like yours with a carve-out transaction.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.

Authored By

Kip Irle

Kip Irle

Global M&A | Transaction Solutions Leader

Kip joined Hylant in 2013 and has over three decades of experience in the industry. Kip provides strong leadership to his team and clients. Kip's expertise includes mergers & acquisitions, structured finance and insurance, and alternative risk financing.

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