Last year, deal value exceeded $1 trillion, finally returning to pre-recession levels. Private equity funds were some of the most active investors in the market and a sizable percentage of PE deals involved carving out businesses from large and mid-sized corporates.
PE acquirers face challenging accounting issues when investing in carveouts, and a focus on these issues can significantly improve PE results. Once purchased by a PE firm, companies or subsidiaries that were originally a small component of a large corporate entity must shift their mindset, including their approach to certain accounting issues, such as materiality.
Carved-out entities need to set a clear understanding of what their new stand-alone status means and establish accounting policies in line with their operations. Recognizing the need to change its perspective and making the right adaptations can have important implications for a carveout's long-term success.
Financial reporting is almost always an important issue for carveouts. Before the sale closes, the PE fund should plan and execute pre-closing activities and develop an efficient and well-controlled interim solution to financial reporting requirements. Carved-out companies also need to be able to quickly create operational mechanisms that will allow them to meet any internal and external reporting requirements to close their books. Although most carved-out entities are non-public, it is advisable for these entities to immediately create a system of internal controls that can meet SEC financial reporting requirements for public entities as soon as possible—a step that will simplify the PE's eventual exit of the carveout.
In addition to accounting issues, carveouts need to determine how best to right-size their organizations. These newly divested companies will frequently have the advantage of having a more streamlined decision-making process. This includes the ability to more quickly adopt cost savings and operational efficiencies. But they may be challenged by determining how to align personnel to refined operations while at the same time trying to migrate away from any shared services provided by the seller or the transition services agreement. Early attention to these unique carveout issues can help improve deal outcomes.
By Dean Bell, a Partner in KPMG's Deal Advisory Group. He can be reached at +1 (212) 872-5527, firstname.lastname@example.org
This article represents the views of the author only and does not necessarily represent the views of PitchBook.