Trouble in paradise: carving out the target acquisition

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July 17, 2025

by a searcher from INSEAD in San Francisco, CA, USA

I'm under LOI for a business that shares a ton of expenses with a sister company the seller is keeping. Currently knee-deep in the weeds. If we push all the shared expenses into the target, EBITDA drops significantly, ~20% lower than what was presented. But if we just go with the seller’s original allocations, we risk inheriting surprise expenses post-close. Anyone else navigated a carve-out like this? And if so, how did you protect yourself against post-close surprises while maintaining a good seller relationship?
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Reply by a searcher
from St. Petersburg College in Tampa Bay, Florida, USA
In my opinion, Assume all the shared expenses go to the acquired business unless you can absolutely prove otherwise. I had a deal last year under LOI in a similar spot, carve-out of a business. Seller tried to allocate a percentage of things like CRM, Warehouse software, Support software (ecom business) -- But the reality was, you cannot allocate a % for most of these shared services because as a standalone you will incur the full cost and don't have the benefit of spreading your cost between two entities. Even employees (this is harder to diligence, you'll always have tons of cross-work if they're in a shared space especially). Tread carefully, weigh whether the headache is worth it, and always err on the side of protecting yourself as the buyer. There's not a lot of people willing to go through the pain in the ass of a carve-out so buyer pool is much smaller, you have leverage.
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Reply by a searcher
from The University of Chicago in Los Angeles, CA, USA
Hi Jason - Agree with the comments on building up a bottom up cost estimate for the business. Would go person by person, expense by expense. When in doubt be conservative. I would also look at similar businesses to make sure that you aren't looking at a margin that is unrealistic. It will take a lot of work, which can't be avoided. It is in the seller's interest to understate the carveout estimates. That said, sometimes carveouts are the best deals. Good luck!
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