Why private equity firms need to understand legal entity formation requirements in carve-out deals
Head of Advisory
01 OCT 2021
Cross-border carve-out deals are an increasingly popular acquisition strategy for private equity firms. Due diligence and planning are essential to minimising risk and ensuring that a carved-out business is ready for success. One critical but often overlooked part of this process is legal entity formation.
To understand the landscape of global M&A carve-out deals and the role of legal entity formation, we spoke with three experts with decades of combined experience providing guidance to private equity firms.
Tamara Sablic is Vistra’s commercial sales director. With 14 years of industry experience, she works with global private equity funds and their portfolio companies to help them operate more efficiently. Maria Scofield is Vistra’s relationship management director and has over 20 years’ experience helping companies in private equity, real estate and venture capital manage their operations. Anastasia Williams leads Vistra’s commercial private equity practice in North America. For more than a decade, she’s helped global private equity funds and their portfolio companies expand into new markets.
What’s a carve-out deal and why are they popular now in the private equity space?
Tamara: A carve-out is the sale of a specific business unit of a global multinational company. A large transaction often has many bidders from
Carve-outs can be beneficial to both the seller and the buyer. The seller is able to sell a business unit that may not be core to their strategy or may not be performing at the level they want, and they can use the funds from the sale to reinvest in other parts of their business. For buyers like PE [private equity] firms, carve-outs present a great opportunity to strengthen their portfolio and raise funds. A PE firm will look for a business that fits into their investment strategy and areas of expertise, and one that has potential synergies with other companies in their portfolio.
What role does legal entity establishment play in an M&A carve-out deal, and why is the timing so critical for PE buyers?
Anastasia: Carve-outs are more complicated than a full acquisition because the entire corporate structure of the purchased business must effectively be re-established. Any services that stayed with the parent company — like HR, IT, finance and payroll — need to be set up for the carved-out business unit. To establish these processes, you need a legal entity first. Establishing a legal entity is not only critical to the success of the carve-out, but it requires a lot more time and resources that PE firms typically expect.
Maria: PE firms must do their due diligence to be adequately prepared for this stage of the process, because entity formation needs to be completed before the target close date. The transition services agreement, or TSA, states which services the seller will continue to provide — like payroll or accounting — while the buyer prepares to receive and operate the new business. The TSA outlines the close date, which is the point at which buyer must have an entity established so they can provide those services. If the PE firm is not on track to have entity establishment by that date, they will need to renegotiate the TSA or find another stopgap solution.