Glossary · Transaction type
Corporate Carve-Out
Also called: divestiture · corporate divestiture
In corporate finance "equity carve-out" also means a partial IPO of a subsidiary; this page covers the sale of a business unit, typically to a private equity buyer, and the transition services agreement that supports it.
A corporate carve-out is the acquisition of a division, subsidiary or business line from a larger company, which must then be separated from its former parent into a stand-alone business with its own systems, people, contracts and financial statements.
A large company decides to sell one of its businesses and a private equity fund buys it. Unlike a company that has always been independent, the business has relied on its parent for IT, finance, human resources, purchasing, premises or brand, so the buyer must build or buy all of that. During the transition the seller usually keeps providing some services under a transition services agreement (TSA).
Why carve-outs differ from other buyouts
A carve-out has no history as a stand-alone company. Its reported results are prepared from the parent's records with allocations of shared costs; its employees, contracts and assets may be spread across several legal entities; and the people who know it best may stay with the seller. Sellers are often more focused on a clean exit from a non-core business than on maximising price, but the separation work is real and the buyer carries it. Sponsors that do carve-outs regularly plan the separation before signing.
Entanglements and the sale perimeter
Before signing, buyer and seller map every dependency between the business and its parent: shared IT systems, data and software licences; intellectual property and brands that may stay with the parent and need licensing; customer and supplier contracts held by the parent or covering several businesses, which may need counterparty consent to transfer or split; shared sites and leases; employees, benefits and pension arrangements; treasury, cash pooling and intra-group funding; tax group membership; and permits held at group level. The sale perimeter, meaning exactly what transfers, is defined against this map. Anything that cannot transfer at closing is covered by transitional arrangements.
Transition services agreement (TSA)
A TSA is the contract under which the seller keeps providing services to the carved-out business for a limited period after closing: typically IT and hosting, payroll and human resources administration, finance and accounting, procurement, logistics or facilities. It lists each service, its performance standard, its price (often cost or cost plus a margin, by negotiation), its duration and extension options, and the plan for migrating each service to the buyer's own systems or providers. The TSA buys time but creates dependence on a seller whose interest in performing fades once it has been paid. TSA scope and exit planning are diligence items in their own right, and extensions negotiated late are expensive.
Reverse TSA and long-term agreements
A reverse TSA runs the other way: the carved-out business provides services back to the seller, for example where a shared function sat inside the unit being sold. Carve-outs also often come with long-term commercial agreements (supply, distribution, manufacturing or intellectual property licences) that keep buyer and seller trading after the transition. These affect the business's revenue and costs for years and are valued as part of the deal, not as transition mechanics.
Stand-alone costs and carve-out financials
Carve-out financial statements show the business as it was run inside the parent, including allocations for central services that may be higher or lower than what the business will pay to run those functions itself. Buyers estimate stand-alone costs, the recurring cost of replacing parent services (dis-synergies), and keep them separate from one-off separation costs such as IT separation, rebranding, recruitment and TSA fees. Lenders and the buyer's quality of earnings and financial due diligence providers test both. Run-rate EBITDA after stand-alone costs, not the carve-out figure, should drive value and leverage, as the worked example shows. Financing may also need audited carve-out statements, which take time to prepare.
Deal mechanics
Carve-outs usually use completion accounts and a purchase price adjustment, because there is often no reliable stand-alone balance sheet on which to base a locked box. Employee transfers follow the employment law of each jurisdiction involved, which can require consultation or transfer staff automatically. Where a UK carve-out is a relevant transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), the employment contracts of staff employed by the seller and assigned to the transferred organised grouping are not terminated by the transfer: they have effect as if originally made with the buyer (regulation 4(1)), unless an employee informs the seller or the buyer that they object to becoming employed by the buyer (regulation 4(7)). Buyers are often sponsors executing a leveraged buyout, sometimes with the unit's managers investing alongside them in a divisional management buyout. The seller sometimes keeps a minority stake, which aligns it with the business after the sale but leaves the former parent as a shareholder.
Worked example
Illustrative stand-alone adjustment ($ millions)
Carve-out accounts show EBITDA of $80m after $10m of allocated parent costs. The buyer estimates that replacing those services on a stand-alone basis will cost $16m a year, so stand-alone EBITDA is $74m. At a 9.0x multiple the $6m difference is worth $54m of enterprise value. If lenders had sized $400m of debt at 5.0x the $80m figure, leverage on stand-alone EBITDA is 5.4x.
Examples are illustrative; figures are not market data.
Not the same as
- Spin-Off: A spin-off separates a business by distributing its shares to the parent's shareholders; no outside buyer acquires it.
- Management Buyout: A management buyout (MBO) is defined by its buyers (the managers); a carve-out by separation from a parent. A divisional MBO is both.
- Trade Sale: A carve-out sold to a strategic buyer is, for the seller, a divestiture by trade sale; the strategic may integrate the unit into its own systems instead of building stand-alone ones.
How it is classified
- Classify as a corporate carve-out when the target is part of a larger corporate group and must be separated from it operationally, whatever the buyer type.
- If there is no buyer and the business is distributed to the parent's shareholders, classify as a spin-off.
- A carve-out can also be a leveraged buyout (LBO), with a sponsor buyer and acquisition debt, and an MBO, with managers among the buyers; record each label.
Common mistakes
- Valuing a carve-out on carve-out EBITDA without replacing allocated parent costs with realistic stand-alone costs.
- Treating one-off separation costs as recurring, or recurring stand-alone costs as one-off.
- Underestimating how long the TSA will be needed; IT separation often takes longer than planned.
- Assuming contracts and licences transfer automatically; many need counterparty consent.
- Using a locked box when no reliable stand-alone balance sheet exists.
Edge cases
- A strategic buyer that integrates the unit into its own systems needs a shorter TSA and fewer stand-alone costs, which can let it outbid a sponsor.
- Where the seller keeps a large stake, the deal resembles a joint venture and governance terms matter as much as price.
- A subsidiary that already runs its own systems and has audited accounts is a carve-out in name only; separation work is minimal.
Sources
- The Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246), regulation 4. UK Government (legislation.gov.uk), Revised text; up to date as of 30 September 2026 per page. Status: in force (checked 2026-10-01). SI 2006/246 reg. 4(1), 4(7) — supports: A relevant transfer does not terminate the contracts of employees assigned to the transferred organised grouping, which have effect as if originally made with the transferee, except where the employee objects under reg. 4(7)