Winning the separation

Value is too often tracked in one place and delivered in another. Leading sellers close this gap by embedding value initiatives into separation execution, creating a single, integrated view of activities, dependencies and value outcomes. This helps ensure value is actively delivered, not just assumed.

Where the value creation opportunity is significant, we often advise our clients to establish a dedicated value creation workstream focussed on identify, quantifying and ultimately tracking value opportunities.  Value creation workstreams are typically structured by opportunity themes (organisational, commercial, operational, etc.) while separation workstreams are usually aligned to functions to define and implement the standalone operating model.  While these workstreams serve different purposes, they are inherently interdependent.  The most successful carve-outs ensure value priorities are embedded into separation decisions, creating a separation programme that not only achieves independence but also maximises value.

Our work suggests that the leading organisations are breaking down the traditional divide between separation and value creation.  By bringing carve-out and value creation experts together under a single programme leadership team and separation management office, they embed value thinking into every stage of the transaction, turning separation from a minimal effort exercise to deliver what is needed into a value-led transformation.

“Carve-outs can be challenging and the risk often increases the closer you get to deal close. But that is no reason to take your eyes of the prize,” notes Mala Shah, Partner at KPMG. “Maintaining a value focus through planning and execution is critical to delivering on the stakeholder expectations of a carve-out for both CarveCo and RemainCo.”

People and culture remain among the biggest determinants of deal success, yet they are often overlooked in separation planning. While systems and processes can be redesigned or replaced, the loss of key talent or employee confidence can erode value far more quickly.

One of the most common pitfalls is underestimating the complexity of the HR function separation.  Unclear workforce boundaries, HR dependencies, payroll arrangements, benefits and compliance requirements can create operational disruption, increase costs and distract leadership from the broader value agenda.  The objective is not simply operational continuity but creating a platform for future growth which is compliant and attractive for employees.

Communication is equally critical.  Uncertainty fuels attrition, particularly among the talent buyers value the most.

Successful sellers communicate early, often and transparently giving employees confidence in the future and helping retain the people needed to protect and grow value.

Ultimately, carve outs are delivered by people, not workstreams.  Organisations that invest in culture, leadership and employee engagement throughout the separation process are far better positioned to preserve momentum and realise the full value of the transaction.

“Overlooking the importance of protecting culture can create cultural misalignment where the focus on operational separation overshadows the ‘human side of a deal,” notes Amy Bishop, a Director in the Deal Advisory practice at KPMG in the UK. “Our experience suggests that defining core values and embedding these into everyday HR practices, through leaders actively modelling the desired behaviours, will see a more positive transaction.”

Creating robust proforma financials based on the carved out business and the decisions being made on standalone are becoming increasingly popular by leading organisations.  Whether within the parent ERP or a dedicated environment, this provides early visibility on CarveCo performance and gives management and buyers greater confidence in the standalone. More importantly, it helps surface the issues that matter most:  cost allocations, operational entanglements and stranded cost exposure.  Establishing a single source of truth early can strengthen due diligence, support valuations and reduce uncertainty and protect value throughout the transaction.

“Leading sellers typically present robust financials that show the impact of separation on the target business’s earnings before interest, taxes, depreciation and amortisation,” adds Kelly Martin, a Partner in our Accounting Advisory Services team. “They ensure that cost models are detailed, with assumptions that can be defended through rigorous diligence to avoid value leakage.”

The organisations that extract the most value from standalone preparation treat it as a strategic transformation, not a compliance exercise. Investing early in data linkages, allocation frameworks and governance creates a reporting model designed to scale seamlessly into CarveCo's future platform.

Transitional service agreements (TSAs) are legal agreements with supporting schedules that describe the services one organisation will provide to the other (at a cost) for a period of time after the deal closes (typically up to 12 months). The idea is to safeguard both CarveCo and RemainCo through a smooth and issue-free Day 1.

Transitional Service Agreements (TSAs) are designed to de-risk Day 1, providing critical support services while replacement capability is being established. The most successful carve-outs design the TSA exit from day one, using only what is necessary while rapidly building the capabilities required to stand on their own.

“But TSAs should be seen for what they are: a temporary bridge, not a destination. Overreliance can delay value creation, inflate costs and prolong separation. Managing the number and length of TSAs should be a priority, as most businesses are not service providers for TSAs; ensuring these agreements are critical, appropriately costed and limited to a manageable period is essential,” advises KPMG in the UK’s Mala Shah.