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 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. That said, sometimes carveouts are the best deals. Good luck!
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Reply by a searcher
from Massachusetts Institute of Technology in Tulsa, OK, USA
I did one for a fortune 500 company. Ultimately you need a combination of a tiny amount of trust and a large amount of due diligence. If you don't have industry experience, it can be much more difficult to evaluate it.
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