Navigating Carve-Out Complexities: Creating a Platform for Growth and Value Realization

Private equity (PE) firms often encounter significant challenges when executing carve-outs. The process is inherently complex, and gaps in strategy and planning can lead to delays and broader issues that can significantly impact overall value realization. This underscores the importance of careful consideration and thorough preparation.

Yet, despite their complexities, carve-out are uniquely positioned to weather uncertain market conditions. They offer a promising path forward, emerging as a significant source of dealmaking in 2024.

While balancing competing priorities is critical to carve-out success, deploying a lead-to-cash process ranks among the most essential: Establishing a platform to support revenue generation and growth allows the NewCo to get to value quicker following the transaction.

We’ve learned a great deal from our experiences in setting up commercial and revenue operations for carve-out transactions. Here, we’ve outlined best practices, including potential pitfalls and how to proactively plan for and address them, focusing on data readiness, specialty application support, and executive leadership transitions.

Anticipating Challenges in Carve-Out Transactions:  

1. Understanding Data Readiness and Its Implications

Undoubtedly, one of the most significant hurdles in carve-outs is ensuring data is ready for transition. The data associated with the carved-out entity (i.e., contracts, subscriptions/renewals, accounts, products, etc.) is often entangled in multiple systems, making separating, cleansing, and preparing for the transfer challenging. Underestimating the quality and readiness of the data, alongside effective use of data analytics for business transformation, at the start can affect the overall project timeline and incur significant costs to fix issues on the back end.

2. Addressing Lack of IT Vision and Leadership in Transition

A holistic plan is needed for IT, involving the teams that will be using the technology and dependent on the processes. A lack of vision for IT strategy and enterprise architecture will result in short-term thinking with long-term impacts. For example, when setting up a lead-to-cash process, you must carefully consider where your billing solution should reside (within an ERP, CRM, or other system). By failing to plan with the end in mind, you could significantly overcomplicate this process and inadvertently create substantial technical debt.

3. Avoiding the ‘One-Size-Fits-All’ Mentality in Carve-Outs

Each carve-out is unique and requires meticulous planning to avert misalignments. Often, we see a lack of support for specialty CPQ and billing applications, such as those found in Salesforce and NetSuite. These applications demand a different level of managed services and ongoing support compared to mainline production systems. Transaction service agreements (TSAs) between the new and old companies frequently fail to account for this nuance, leaving the new company either under-resourced or lacking the necessary support to set up crucial commercial and revenue operations processes, such as lead-to-cash.

Planning Ahead for a Smooth Carve-Out Transition: 

1. Strategies for Getting Data Ready Early in the Process

PE firms should consider conducting a data readiness assessment early, ideally before or during the due diligence phase. For example, an assessment should involve:

• Defining a target data model for critical processes, such as lead-to-cash, based on the chosen systems (e.g., Salesforce or NetSuite).
• Comparing the current data from the combined company against the target data model to identify gaps and discrepancies.
• Assessing the level of data manipulation and cleansing needed to achieve the desired data quality.
• Incorporating the findings into the project timeline and budget to account for the necessary resources needed for data preparation.

Addressing data quality and availability issues upfront can accelerate the pace of the project, particularly during the testing phase. This proactive approach helps to avoid unexpected delays, budget overruns, and user adoption challenges that often arise when data issues are not addressed early on.

2. Holistic Planning for IT: Aligning Vision, Strategy, and Leadership

Properly aligning the overall IT vision with strategy, enterprise architecture, and leadership is critical. To mitigate the risks associated with likely executive leadership transitions within the IT function, PE firms and their service providers should:

• Anticipate leadership changes, including turnover, are likely to occur and plan accordingly.
• Forge a strong partnership with Finance. Understand the impacts that range from the billing process to revenue recognition policies.
• Prepare for potential gaps in solutions prioritized by business leaders versus IT executives, who tend to focus on more sustainable and affordable enterprise architecture.
• Consider internal candidates and provide them with the necessary training and support to take on leadership roles. Alternatively, you may need to recruit external talent with expertise to ensure a smooth transition.
• Maintain close alignment with PE owners and executive leaders on critical IT decisions throughout the project.
• Establish frequent steering committee meetings and escalation channels to ensure continuity and alignment.
• Understand that appointed or newly hired leaders may need time to ramp up or may want to modify existing plans and build flexibility into the overall project plan to accommodate necessary changes.

By proactively planning for and managing leadership transitions, PE firms can minimize disruptions, maintain alignment with key stakeholders, and ensure the IT function has the right resources and is well-equipped to handle the transition.

3. Engaging Specialized Managed Services Providers for Key Applications

PE firms may need to consider engaging specialized managed services providers (MSPs) for critical specialty applications, such as Salesforce and NetSuite. Key considerations include:

• Understanding that large, generic MSPs may not have the depth of expertise required for specialty applications like Salesforce and NetSuite.
• Engaging boutique or specialized MSPs with deep knowledge and experience in specific applications and processes, such as lead-to-cash or configure-price-quote (CPQ).
• Consolidating vendors by selecting an implementation partner offering managed services, which can lead to better pricing, knowledge retention, and long-term success.
• Treating specialty application MSPs as a separate consideration from the TSA transition process, ensuring the necessary support is in place before the TSA ends.
• Establishing standardized agreements, streamlining the process for future carve-outs.

By proactively addressing the unique support requirements of specialty applications, PE firms can reduce the risk of business disruption, establish revenue operations, and maximize the value of their technology investments.

Conclusion: Integrated Approach for Successful Carve-Outs

A successful carve-out depends on an integrated approach that carefully considers people, processes, data, and technology. By investing time and resources upfront to plan properly, PE firms can significantly reduce risks, accelerate the deal cycle, and avoid unnecessary delays and costs.

Spaulding Ridge has a deep understanding of the complexities involved in carve-outs. Drawing from our experience, we assist PE firms in navigating these challenges. You can rely on our team of experts to guide you through data readiness, leading technology solutions, sustainable revenue operations, and more to ensure a successful carve-out. Contact us to learn how we can help accelerate your path to growth and value realization.