Carve-out, explained simply
A division shares offices, IT systems, finance, HR and purchasing contracts with its parent. After the sale it must buy those services itself or take them temporarily from the parent. Historic figures rarely reflect these real costs, and parent allocations bear little relation to them.
The right basis for price and lending is standalone EBITDA, not reported division EBITDA.
From division profit to standalone EBITDA
IllustrativeCoatings division of Pinecrest Industrial, $ millions
Standalone EBITDA is $0.6 million below the division’s reported figure, and separation also requires $1.2 million of one-time cost.
Principal diligence questions
- Which costs did the parent allocate, and do they reflect real future costs?
- What will standalone finance, HR, IT and insurance actually cost?
- Which shared contracts and supplier discounts will be lost?
- What one-time separation costs are required?
- Which services will the parent provide temporarily under a TSA?
Worked example
| Coatings division, $ millions | Amount |
|---|---|
| Division profit before parent charges | 7.0 |
| Parent’s allocated corporate costs | (1.0) |
| Reported division EBITDA | 6.0 |
| Remove parent allocation | 1.0 |
| Estimated standalone costs (finance, HR, IT, insurance) | (1.6) |
| Standalone EBITDA | 5.4 |
Pinecrest Industrial is a fictional company. All figures are illustrative.
Why it matters in a deal
Using reported division EBITDA would overvalue the business. Standalone figures are the correct basis for price and financing.
Red flags
- Allocations unrelated to actual usage
- Customer or supplier contracts in the parent’s name
- Key staff who will remain with the parent