Explore the crucial steps to maximize sale price, transaction speed as well as reduce deal risks. Enhance the proccess of your new entity working standalone.
In order to maximize sale price, transaction speed as well as reducing deal risk, it pays to carve out the entity to be divested so it can operate standalone as far as possible, regardless of who the buyer might be. From the buyer’s perspective, a near stand-alone entity is a much more attractive proposition. It makes it much easier to value the asset, perform due diligence and avoid any nasty operational surprises or delays. Importantly, it instils buyer confidence and helps reduce and simplify the scope of negotiation down to the business being sold.
Naturally, there will be areas where the carve-out cannot occur without a better understanding of the buyer and their intentions. This is to be expected. It may even be preferable to leave something for the buyer to do as part of the value/price proposition. This is where a well-structured TSA, created from a position of mutual trust, can be used as an effective negotiating tool prior to signature.
With the current ‘as is’ operating model developed, it’s time to shift focus on what the business should like at deal close.
Executive sponsor, separation manager and deal team
Meeting Agenda, Whiteboard, Strategy Documents
Spend one day or more to prepare materials for a two hour play.
Day 1 represents a fixed point in time when the sale of the divested entity is completed, and legal ownership passes onto the buyer. The purpose here is to gather from the analysis of the current state operating model on what needs to be done in the time available to stand up the divested entity so it can operate as independently as possible. Setting a firm Day 1 upfront is critical to helping teams prioritize activities and resolve issues.
A typical set of requirements is as follows:
In most circumstances, there is either not enough time nor practical to physically separate a business out from its parent prior to Day 1. Transitional Services Agreements (TSAs) therefore become the fall-back option when there is a conflict on how quickly the deal can close versus the time it takes for organizations to separate.
While complete separation is usually the ultimate goal prior to Day 1, interim solutions are required when:
As shown in the table below, when there is not enough time to fully unravel a business entity from its parent, interim solutions are required for the transaction to proceed. These solutions need to be discussed with IT security, IP and Legal to determine the sellers' appetite for risk. For example, the seller may want proprietary data on their systems to be fully locked down without access from the buyer.
Carving out IT applications is particularly complex. For example, a large company can have hundreds of applications running on multiple servers across distributed data centers. So there needs to be a way to achieve a sufficient level of operational independence for the divested entity so the transaction can complete. The common options are as follows:
TSAs are service agreements between buyer and seller companies (or divested entities) in which one entity provides services and support (i.e., IT, finance, HR, real estate, payroll, etc.) to another after the closure of a divestiture to ensure business continuity.
There are a number of activities that can significantly impact the transaction timeline. The seller will, therefore, need to act immediately to reduce the risk of this happening.
Here are some examples:
The Day 1 operating model serves as a blueprint for how plans should be developed and people organized to get the critical work done. It encompasses decisions around the divested entity and the boundaries between itself and the parent entity.
Designing the operating model starts by describing the carve-out strategy and key principles on what needs to happen independent of what the buyer can bring to the table.
Importantly, a Day 1 Operating Model provides a clear and credible explanation on how the business is intended to work at close. From a deal perspective, it can make a significant difference in securing a price premium for the business. Use this deliverable to explain the following:
Business Locations: A map and key statistics for each of the offices/plants.
Organization: A chart and table that defines how the business is structured.
Technology: Provide network and application architecture diagrams
Suppliers & Partners: List of major partners and their contribution to the value chain.
Business Inventory: more than the typical ‘asset register’ found in sales & purchase agreements, the business inventory lists every aspect of the entity that is to be sold in detail - employees, buildings, equipment, IP, policies, software, insurance arrangements, contracts, supplier agreements, customers, etc.
Value Chains: a map showing each of the process steps in value generation, who performs the work, where processes are shared, and how they link to shared service processes (e.g. procurement, AP, AR and so on).
Performance: a table laying out the types of people, incentives, accountabilities and cultures.
The Day 1 operating model defined and a carveout strategy developed, the next logical next step is to commence planning and set up the governance structure for the work. The plans need to capture critical milestones, due dates, cross-functional and cross-project dependencies, and planning assumptions. For companies with significant global footprints, refining the global Day 1 plans into country/local Day 1 plans is essential. The country/local Day 1 plans should document additional country-specific activities (e.g., setting up local legal entities for local finance functions and tax filings).