CFOs, Are Carveouts Part of Your Profitable Growth Plan?

Carveouts were responsible for 12.6% of all private equity buyout deals in Q1, according to Pitchbook’s Q1 2024 US PE Breakdown report. This has increased more than double since Q4 of 2023, becoming a large aspect of dealmaking as the activity does not appear to be slowing down over the course of this year. ?

Last month, I wrote an article on CFOs’ top priorities in 2024 which included a focus on profitable growth. ?

CFOs are focused on:?

• Reviewing current product and service pricing strategies and doubling down on profitable revenue streams. ?
• Scrutinizing budgets and identifying areas of cost savings through process efficiency.?
• Carefully evaluating growth opportunities against potential ROI. ?

As we think about carveouts, how are CFOs prioritizing specific sectors or offerings of their organization to grow and sell? What are the benefits and what does the value look like post-carveout??

Benefits of selling a business unit include:?

• Cash?

• Improved earnings stability?

• Increased time to focus on other key assets of the business ?

Before selling any portion of a business and reaping the benefits, it is critical to build a divestiture strategy to inform short-term and long-term goals, understand potential complications, and finally execute the plan.?

Unlocking value in the business post-carveout:?

Carveouts tend to impact the general and administrative (G&A) functions of finance, HR, legal, and IT. Standing up these teams in an optimal target organization with the right team size, shape, and cost base can ultimately unlock tremendous value post-carveout. This should be done using a combination of levers including:?

• Management spans and layers: Increasing the number of direct reports to managers; removal of management layers; and simplification of structures such as the removal of matrix organizations between global, regional, and local BU levels.?
• Role consolidation:?Removing and consolidating duplicate roles; or centralizing and consolidating fragmented functions across sites and business units. For example, consolidation through the creation of shared service centers or centers of excellence.?
• Right-sizing: Optimizing functions based on the appropriate size and scale of the target standalone business.?
• Process optimization: Technology and non-technology enabled process simplification; and elimination of redundant processes such as group reporting.?

The benefits of selling a business unit are clear, navigating potential challenges poses questions for successfully managing a carveout and if it makes sense to go it alone or hire an outside team for support.?

Projects like these typically initiate the conversation of hiring an interim CFO or leader to manage it, especially so day-to-day tasks are not neglected in the process. Having a professional leading a carveout with previous expertise selling business units for organizations makes a substantial positive difference–it eliminates the guessing and creates a streamlined process. ?

As carveouts continue to impact the 2024 landscape, my team and I stand ready to support you and your teams as you look to strategize and execute a successful carveout. ?