Trouble in paradise: carving out the target acquisition

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

11mos ago

Trouble in paradise: carving out the target acquisition

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 11mos ago
in Los Angeles, CA, USA

Pleasure! Have seen it go wrong, even on major $Bn deals (with extensive TSAs in place), especially when it's a competitive bid and the Buyer is trying to make the deal "pencil." Some watch items that come to mind on bottoms-up are scale inefficiencies - e.g. if Seller is licensing SW at $x per user and you are below the providers threshold you could pay more per user; they propose e.g. 1.5 FTEs but in reality you can only hire people full time for that role; and fully burdened costs i.e. in addition to salary plus benefits you need to layer in ~20% to cover other costs like IT, real estate / desk space, etc. Another item beyond support that may not be identified as a co-mingled expense and is often overlooked is marketing/advertising costs.

reply by a searcher 11mos ago
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.