The carve out occurs when a company separates a part of the company that it decides to sell. This, since he does not want to sell the company in its entirety, but only a part of the business.
In other words, a carve out is a divestment of assets that a company makes when it considers that it is not achieving its strategic business objectives. The idea is to use the income from that sale in other business units or production processes that increase the value and profitability of the firm.
Indeed, a carve out or separation is very similar to a spin-off, division or division of the company. But, the fundamental difference is that in the carve out the assets are not sold to the existing shareholders, but rather they are taken out for sale through a public offering; creating a new company that works independently.
As a consequence, in the carve out, the part of the company or business that is put up for sale is separated. The reasons for a separation can be very varied. One reason may be the case of business units that are proving unprofitable. Another reason may be that the company wants to concentrate on the main activity where it has a greater competitive advantage. Also, it can be done to capitalize without acquiring debt and thus there could be many more reasons according to the needs of each company.
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When is it convenient to carry out a carve out?
It is convenient to carry out a carve out process when there is a lot of political and economic instability. Undoubtedly, the situation of instability implies for any company to work in a situation of greater uncertainty. This is because a considerable drop in sales and profits can occur, which can ultimately negatively affect a company.
Naturally, this situation causes companies to carry out financial analysis and one of their possible options could be to opt for a separation. These divestments will always have the purpose of increasing the profitability of the company. Of course, to carry out a divestment, it is necessary to carry out a complete and in-depth financial analysis.
Aspects to consider when carrying out a carve out
Among the most important aspects that should be considered when carrying out a carve out we find:
1. Identify the business that will be carved out
In the first place, the most suitable business unit to carry out the divestment process must be identified. Before putting it up for sale, you have to consider if there is no other alternative that can help improve your level of profitability. If there is clearly no other alternative, the sale process can be started.
2. Determine the potential value of the business unit to be put up for sale
Secondly, the potential value of the business unit that will be sold must be known. It cannot be forgotten that the resources generated by this disinvestment will serve to be reinvested within the company.
For that reason, it is convenient to carry out a complete evaluation of all the necessary parameters that help to make the decision. Only in this way can you have a precise criterion on whether it is worth selling or not selling at that particular moment.
3. Identify potential buyers
Thirdly, potential buyers who are interested in acquiring the business unit in which the company wants to divest are identified. Of course, it must be analyzed that the value assigned by the buyer is greater than the value assigned by the company. Only then will it be profitable.
4. Transition time
Finally, the period of time needed for the unit to separate and function independently must be taken into account. A transition time will always be necessary for the company to work together with the buyer.
Aspects to consider when carrying out a carve out
Legally how a carve out is carried out
The legal form how the carve out can be carried out can be as follows:
- As a sale or contribution to the creation of a new company.
- As a sale of all existing obligations and rights through succession under universal title.
Legal way to do it
How can carve out add value to a company?
Generally, every company has a portfolio of assets. Some of them can be highly profitable and some may not. Under these conditions, it is possible to consider whether it is convenient to dispose of the assets that are proving less profitable and determine where more could be invested with the resources obtained.
Consequently, the resources obtained allow the company to achieve greater growth and increase its profitability levels. That means these divestments create value for companies.
In conclusion, it can be said that the carve out process can be used as a growth strategy for a company. Therefore, the carve out not only has an economic objective, but also responds to a strategic objective.
Thus, companies analyze the business units they have, and then concentrate on investing in those units that are essential for the development of the business. To obtain more resources, they use the process of selling units that are not essential or that are not very profitable.
