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Private Equity Carve-Outs: Keeping IT from Slowing Yours Down


Divesting a business unit presents the seller with a number of challenges, ranging from financial to personnel to technology systems. But for the purchaser, the challenges of standing up the carve-out as an independent company can be even greater.

As we’ve said many times, your due diligence efforts before any merger, acquisition or carve-out should include a deep assessment of the seller’s IT infrastructure. For a carve-out, IT due diligence (ITDD) identifies all the people, processes, systems, data and integrations upon which the unit being carved-out relies for its daily operations. Even if these components could simply be excised from the seller’s infrastructure, it might not be wise. ITDD can also uncover deficiencies and opportunities for improvements in these areas.

All these operational components have to be duplicated or replaced with standalone equivalents. In addition, the necessary data has to be extracted and loaded and the independent infrastructure verified if the carve-out is to stand up on its own. If gross inefficiencies were identified, recommended alternatives must be implemented.

Identifying the time, resources and cost required for these efforts is one tremendous value of ITDD. These elements can be factored into the total cost and schedule of the transaction to avoid surprises.

Let’s say the ITDD team identified all these items and an agreeable transitional service agreement (TSA) has been signed. Even so, the actual infrastructure portion of a carve-out is often slower than expected. Here’s why and how you can avoid it on your transaction.

What slows the transition down

Carve-outs don’t happen all at once, just because the parties sign the transaction. A TSA is critical, since the seller must provide the buyer a certain level of support over a defined period. Sometimes, though, the length and complexity of support required is underestimated.

  • Built-in intent of extension

Sometimes a seller will agree to a shorter-than-needed transition period to make the deal more attractive. After that period, they are able to extend the support at a significant price.

  • Loss of interest

Even with best of intentions, at some point the seller just wants to get on with his own business. The seller’s level of support degrades, shifting more onto the shoulders of the buyer’s team. This in turn leads to a longer, more costly than expected transition.

  • Complex, highly-integrated systems

One of the most critical purposes of ITDD is to understand the nuts and bolts of the systems already in place. These are the systems from which the carve-out has to be excised. Systems and databases not easily separated or duplicated can make smooth and timely transitions difficult. This is especially true of homegrown, legacy and no longer supported applications. Either these have to be replaced altogether, or the new company has to maintain connectivity and support with the selling company for an extended period.

Mitigating the risk of slow, expensive transitions

All these factors can lead to unexpected costs and an extended transition period. Proper IT due diligence can’t predict if the seller will fall down on their end of the TSA bargain. But ITDD can provide you more accurate time and cost estimates for standing up the carve-out on an independent infrastructure.

To avoid potential cost and time overruns, select an IT due diligence team that’s also experienced in building out infrastructure from scratch. Then you can use the same provider to plan and execute the transition.

Who better to keep a carve-out’s technology transition on schedule and on budget than the experts that performed the assessment in the first place?


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