Acquiring a carve-out presents unique challenges compared to acquiring an entire organization. When you acquire a carved-out entity with the intent to integrate into an existing business, unlocking the full potential of that entity post-acquisition requires more than financial acumen — it demands extensive understanding of the opportunities, issues, and risks related to the deal and having a tailored roadmap for the integration.
Success will hinge on meticulous planning across all functional areas, but the Finance & Accounting function has specific considerations that must be addressed during the preparation and execution of the integration program.
With the right steps, stakeholders can address finance’s integration challenges, bridge reporting gaps, and maintain operational consistency. This will ensure business continuity while maximizing the synergies from the acquisition.
While these types of transaction pose unique challenges in each deal, our experience has identified six critical steps for getting the finance integration right.
- Start by developing a clear understanding of the transaction perimeter – what is included and what is not from a people, process, and technology standpoint.
- Which finance resources are included, and where may there be loss of institutional knowledge due to key individuals being retained by the seller?
- Are the systems required to execute finance processes included, or will the entity need to be brought onto the acquirer’s systems? If the systems are not included in the deal perimeter, how do they tie to other operating systems, and will these be impacted by the separation?
- Are there key vendors that support any of the financial processes, and will contracts with these vendors be included in the deal perimeter?
- Are there any key financial processes (e.g., tax filings) which the business “outsourced” to the parent and need to be replaced at close?
- Understand how existing processes are run, the degree of dependency with the parent, and any differences with your financial processes.
- Utilize different ERP systems
- Operate on different close cadences (e.g., a three-day vs. five-day month close) and reporting timelines
- Prioritize different KPIs and performance metrics
- Be subject to varying reporting requirements, such as those from lenders, regulatory bodies, or private equity reporting expectations and deliverables
- Does the target’s finance team operate as an independent business today or rely on shared services?
- Is the seller’s finance function centralized at the parent company or does the target have its own finance and accounting staff?
- Does the target have its own ERP or ancillary systems that enable monthly reporting or are they an entity in a larger organization-wide ERP?
- Does the target have a separate close process or follow the same cadence as the entire organization?
- Are approvals and other reviews made at the target level or at the organizational level?
- Leverage a Transition Service Agreement to address potential disruptions to key financial processes at close.
- Does your existing team have the bandwidth to take on additional tasks related to the acquiree?
- Can your resources be trained on seller systems (assuming the seller systems will continue to be used under a TSA for a period)?
- Do your existing resources possess the requisite transaction knowledge and experience to manage the finance activities for the acquired business, including the ability to address any unique business requirements?
- Allow the acquired entity’s financials to be consolidated into your financials
- Enable the buyer’s ability to insert buyer employees into key approval processes (e.g., allowing legacy personnel from the buyer to approve purchase orders)
- Contemplate additional protections necessary to ensure proper controls, and to limit the seller’s ability to access critical financial information
- Develop a tailored integration plan for the immediate post-close period and the post-TSA period.
- Understand how financial reporting will be produced immediately post-close, including how the target’s results will be consolidated into the broader financial statements. This should consider addressing accounting policy differences, differences in close timing, and misalignment of chart of accounts, while considering any bottleneck in your team’s capacity for handling the more complex close process.
- The record-to-report process must be adjusted to identify and terminate intercompany transactions with the seller while creating a framework for intercompany activity with the acquirer.
- While the order-to-cash (OTC) process typically is not significantly modified due to potential impacts to the client, there may be the need to change the invoicing entity (especially if the deal is structured as an asset deal), inform the customer of changes to bank accounts (if bank accounts do not transition), and review and adjust how sales are classified, among other changes. If OTC systems are shared, it is likely that a TSA will be needed to ensure continuity.
- Purchase-to-pay processes may need to be adjusted to conform to the buyer’s policies by updating delegation of authority, ensuring that any approval processes are updated to ensure the seller is no longer included in the approval chain, and potentially adjusting payment terms to buyer terms (unless separately stipulated in existing contracts).
- Treatment of payroll processes will be highly dependent on the direction that HR takes regarding new employees. Typically, payroll and benefit transitions are aligned due to linkage between the two.
- Impacts to the treasury function will depend on the deal structure, but they may include the need to transition bank accounts (especially if bank accounts are specific to the acquired business). Where shared bank accounts are used, it is likely that the seller and buyer will need to agree to a cash settlement process until dedicated accounts can be set up for the business and customers' payment processes are updated to pay into buyer’s accounts.
- Address technical matters to create an opening balance sheet as of the acquisition date in a timely manner (including net working capital adjustments, purchase price allocation, etc.).
- Understand the cost impacts of the carve-out and finance functional costs.
- Establish an Integration Management Office (IMO) to manage end-to-end integration.
In a transaction in which a buyer is acquiring a carved-out entity, careful consideration must made during the diligence phase to understanding the seller’s proposed deal perimeter regarding the finance function:
Based on this comprehensive understanding, the buyer must plan accordingly to ensure operational continuity at close, throughout the initial transition period, and in the long term.
Also, it should be noted that until the deal is signed, the deal perimeter is subject to negotiation with the seller. If the seller’s proposed perimeter poses risk to the business’ ability to operate, the finance organization should discuss the possibility of making adjustments to what is included or excluded in the transaction with the deal team.
When aligning key reporting, processes, and systems following the transaction, recognize that the legacy systems, processes, and policies of the acquiree might differ from your own. Identify these differences as early as possible through financial and operational diligence in the pre-close period.
For instance, you and the acquiree might:
Furthermore, carve-outs must be considered as well. For example, it is important to understand:
Understanding the target is crucial during the diligence phase to understand the need for a TSA as part of the integration plan as well as the right approach to the longer-term integration.
In situations where the deal perimeter excludes people, assets, or vendors required to support financial processes, Transition Services Agreements (TSAs) can play an important role in ensuring business continuity where the buyers cannot take over full responsibility for all finance processes immediately at close.
Specific seller scenarios where TSAs are common include situations where (i) the acquired entity does not have its own systems, (ii) the acquired entity does not have its own back office (finance and accounting) employees, (iii) the seller relies heavily on shared services for executing on key financial processes, and (iv) attempting to move the target to your processes could cause disruptions to the core operations or other functional areas. In these cases, it can be advantageous to rely on the sellers to provide key finance services until you can integrate and take over all back-office processes.
When developing the TSA, buyers should also consider their limitations and potential challenges to taking over responsibility for the target’s finance activities at close. Factors to consider include:
When leveraging TSAs, it is critical for buyers to ensure that TSA services are properly defined in the TSA Agreement and Service Schedule, as this document will effectively become the legal agreement contractually obligating the seller to deliver on transition services.
For example, TSA service definitions should properly address any potential changes to current financial process to consider your unique requirements, including changes to:
Remember that negotiated terms in the TSA may place more burden on the acquirer, so be sure to address any risk of TSA acquiree noncompliance. If the acquiree fails to execute the responsibilities under the TSA terms, you will need to effectively and efficiently redeploy resources to accomplish those tasks. The acquiree may even be uncooperative or unresponsive to new issues not specifically governed by the TSA.
When integrating a carve-out, two distinct periods must be considered: (i) the immediate period post-close where TSAs are likely to play a role in ensuring business continuity and (ii) the post-TSA period where the business must be fully separated from the existing parent.
While most companies are willing to provide TSAs to facilitate a sale, they are unlikely to want to be a service provider for a period longer than is necessary. As such, it is critical to consider both time horizons when planning for the integration.
To develop and execute an integration plan, outline a defined roadmap of key activities, transaction and reporting deadlines, and the responsible parties throughout the pre- and post-close timeframe.
Surprises will come with every deal, threatening to strain capacity and cause integration issues. An understanding of dependencies and the deal perimeter will inform a tailored integration plan to mitigate these risks, serving as a guide that can help ensure clarity and alignment from the beginning to the end of the integration.
Immediate Post-Close PeriodBased on a comprehensive understanding of the transaction perimeter, the seller’s proposed TSAs, and your specific requirements, acquirers must develop a detailed Day One operating model that defines how key financial processes will be executed at close – with or without a TSA in place. While all finance “pillars” need to be addressed, below are some of the key processes that typically need to be addressed immediately:
In addition to ensuring continuity of finance processes in the immediate post-close period, the finance function also will play a key role in the administration of TSAs, ensuring that TSA costs are considered in the budget, reviewing and paying TSA billings, accounting for TSA costs, and aligning with other functional areas around the timing of TSAs so that the billing and costs can be accounted for properly as TSAs are wound down.
When developing the plan for the immediate post-close period, be sure to coordinate with cross-functional stakeholders for each key process, considering downstream impacts, such as IT/system changes that could materially affect the finance function and reporting capabilities.
Long-Term Plan – Post TSA ExitSimilarly, a long-term integration plan is vital for a successful TSA exit without undue operational or back-office disruption. As the business will no longer be able to depend on its existing parent company for support, these processes and systems must either be replaced with your existing people, processes, and systems; be built up from scratch; or potentially be replaced with the support from outside vendors.
While buyers may have a significant amount of time to migrate off TSAs (we see terms from three to twelve months as most typical), it is important that planning begins early on, from the moment the letter of intent is signed.
For the finance function, a strong plan and understanding of services required and risks can ensure the buyer is able to support financial reporting and provide a shorter runway for TSA exit, allowing you to save on expensive services and avoid depending on the seller’s discretion.
Finally, when developing a TSA exit plan, it is critical for the finance team to align with other functional areas on TSA exits. For example, finance will need to align with IT for finance system transitions along with HR for any transitions regarding employees (and their respective costs).
When acquiring a carve-out, it is important to note that the cost structure of the business may be impacted based on the deal perimeter, as well as the approach to how the business is integrated. The business’ historical costs structure typically reflects any benefits the business derives from leveraging the parent company’s back-office infrastructure (including any shared service centers, as well as common systems), and these costs could increase or decrease depending on how the business will operate under your operating environment.
As part of the sale process, many companies may propose “standalone” costs for the divested business, but these need to be reviewed and adjusted based on each buyer’s situation. A business that has conducted proper sell-side diligence will provide some of the necessary information to evaluate any potential cost impacts, but in most cases, it is up to the buyer to consider the expected impacts to the cost structure of the finance function and ensure these are considered as part of the valuation of the business.
Despite all these challenges, with proper planning and coordination, transitioning off TSAs can be accomplished without impacting clients, employees, or other critical stakeholders.
To provide structure to the integration process and overall transaction, establish a dedicated Integration Management Office (IMO). The Integration Management Office (IMO) plays a critical role in ensuring a successful integration process by leading the integration plan, addressing dependencies, establishing milestones, and managing issue identification and triage. Regular status and budget reporting to stakeholders is essential to keep everyone informed of progress and any potential challenges.
For complex transactions, the finance team may require a dedicated Finance IMO (FIMO) to address coordination across finance and related subfunctions such as controllership, FP&A, treasury, tax, and risk management.
Without an IMO/FIMO, there is a risk of extended timelines, missed activities, and gaps in integration, such as issues with reporting, licenses, billing cutovers, or incorrect payroll setups. This absence can lead to material errors and complications in operations, reporting, and overall deal progress.
The IMO/FIMO can also play a key role in ensuring that insights gained during the diligence and operational assessment phase are addressed and that potential risks and the level of effort required for successful integration are considered in the integration plan.
The plan should, however, remain adaptable and flexible, as new responsibilities and issues commonly arise. Additionally, the IMO / FIMO can help ensure that lessons learned from this integration process are documented and leveraged in creating a playbook for future deals.
The execution of a strong diligence phase and tailored finance integration plan will allow you and the acquiree to align on key facets of the go-forward business.
You will be able to work together to create the appropriate guardrails throughout the transaction process to highlight, address, and achieve vital business goals, unlocking synergies originally outlined in the deal thesis.