Sunday, 09 August 2021 15:54

Brodies - The Legal View - Carve-out transactions: What do you need to consider?

Caroline Deveney

A ‘carve-out’ transaction involves an integrated business division of a company being identified, separated and then transferred to a third party.

By selling off this business division, a company can focus its attention on its core growth areas or simply dispose of an asset that is no longer considered to be key to the overall business.

A well planned carve-out will allow the seller to maximise its value and complete the deal quickly with minimum impact on its remaining business. It will also allow the buyer to minimise costs and maintain continuity for existing customers and suppliers of the target business.

Sound knowledge of the regulatory and accounting requirements in implementing the transaction is key.

The following are examples of some of the critical factors that will need to be addressed:

1. Due Diligence

It is essential that the seller addresses the due diligence process at an early stage, as this will reduce the risk of any surprises that could have a negative impact on the transaction. The seller will need to consider the time and resources it will need to identify and separate information relating to the target business division. For instance, standalone financial reports for the target business will be required and these can take considerable time to prepare.

In the meantime, key contracts should be checked for any ‘change of control’ consequences.

2. Tax

Tax considerations will influence the structure and timetable of the transaction. When dealing with an international carve-out, the seller will need to consider the tax rules in each relevant jurisdiction to structure a deal that minimises exposure to tax. Additionally, the parties should consider whether the deal structure could give rise to any ‘transfer’ taxes such as stamp duty and VAT.

3. Legal Entity Requirements

From a buyer’s perspective, it will need to consider whether a separate entity will be required to operate the target business. If the target business operates in one or more jurisdictions, the process for forming new legal entities will vary between different jurisdictions.

4. Employees

How will the buyer acquire the target employees? Employees may either be transferred automatically under TUPE regulations or by terminating their existing employment with the seller and entering into new contracts with the buyer. It is essential that the parties take advice on this at an early stage in the process, so as to allow enough time to put the necessary arrangements in place, negotiate whether the buyer will replicate the employees’ benefits packages, and consult with the employees and any trade unions.

5. Licences/Permits

It will need to be established as to whether the licences and permits used by the target business (for example, industry specific licences and environmental permits) can be transferred to the target business. In some cases, the licence/permit cannot be transferred so allowances will need to be made in the transaction timetable for replacements to be obtained.

6. Commercial Property

The parties will need to identify all locations where the target business physically operates and establish whether it can continue to operate in the same locations after completion. The process to transfer property ownership or obtain landlord consent to a lease transfer can be complex and time consuming, so will also need to be factored into the timescales for completion.

7. Transitional Services

A seller can rarely exit from a target business with a clean break on completion. In most cases, the seller will be required to provide transitional services to the business for a temporary period after completion. This gives the buyer a period of grace to transition and integrate the target business. Negotiating the terms and conditions of these services requires a considerable amount of time and planning by the seller but is often overlooked until later in the deal process.

It is evident that carve-out transactions require careful planning. It would be recommended that both parties seek financial, legal and regulatory advice and identify their key concerns and risks as early on in the process as possible to ensure that risks are managed and the parties’ expectations met.


Caroline Deveney is a Senior Solicitor in the corporate team at Brodies LLP. You can contact her on 01224 392293 or at This email address is being protected from spambots. You need JavaScript enabled to view it.

If there are any topics you would like us to cover in future columns, please email us at legalview @ brodies.com.

The information in this article does not constitute any form of advice or recommendation by Brodies LLP and is not intended to be relied upon by you in making any specific decisions or taking (or refraining from taking) any action. If you wish us to give such advice, please contact the author.

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