Approaching the leader of a business unit to propose carving it out is a fatal mistake, akin to 'inviting the turkey to Christmas.' They will naturally be defensive, viewing it as a threat. Instead, initial conversations must target executives *above* the business unit to explore the strategic rationale before involving the person whose division might be sold.
An M&A lead's primary skill isn't deep expertise in every domain, but the ability to assemble and manage a team of specialists (tax, IT, ops). They must know enough to spot issues and deploy the right expert, coordinating findings to assess valuation and integration hurdles, much like a general contractor on a build site.
Third-party contracts with change-of-control clauses are a major carve-out risk, as vendors may hike prices post-acquisition. To mitigate this, explicitly state in the Letter of Intent (LOI) that your valuation is based on the assumption that key contracts will renew at or near historical costs. This provides critical leverage for future negotiations or price adjustments.
To de-risk carve-out acquisitions, sophisticated buyers should recommend the seller commission a sell-side Quality of Earnings (QofE) report before a preliminary bid is made. A seller's willingness to invest in a QofE signals their motivation, and the report provides a more reliable financial perimeter, reducing the risk of later surprises and renegotiations.
To avoid a broken handoff, embed key business and integration experts into the core deal team from the start. These members view diligence through an integration lens, validating synergy assumptions and timelines in real-time. This prevents post-signing surprises and ensures the deal model is operationally achievable, creating a seamless transition from deal-making to execution.
While large investment banks are essential for major transactions, mid-tier banks are often better partners for proactively sourcing carve-out opportunities. They typically have to hustle more for deals, resulting in deeper, more personal relationships within potential sellers, which can unlock the off-market conversations that larger banks might miss.
Experienced acquirers mistakenly believe a standard template can apply to all carve-out deals. However, since every company's internal operations are bespoke, a template is at best 80% accurate. The remaining 20% requires deep, deal-specific analysis to avoid unforeseen integration challenges and costs, making over-reliance on a template a significant risk.
A major carve-out risk is the 'captive client'—the seller's remaining business that relies on the carved-out entity. Post-deal, this powerful client may demand significant fee reductions, destroying the target's valuation. Buyers must negotiate directly with these internal client stakeholders early on to lock in future commercial terms and avoid a last-minute deal collapse.