We are carving out a non-core product line to sell to an industry strategic buyer while keeping our main services company. How do we establish a standalone valuation and deal structure when corporate overhead is shared?

Question

Tyler Smith · Accepted Answer

Selling a division or product carve-out is structurally more complex than selling a whole company because shared resources obscure the standalone profitability of the carved-out unit. Strategic buyers will ruthlessly scrutinize shared expenses, attempting to penalize your valuation multiple by arguing the business will incur massive standalone operating costs once separated.

To establish a defensible multiple, construct a rigorous pro forma standalone income statement. Identify all shared overhead currently absorbed by the parent entity, including executive management, IT infrastructure, accounting, customer service, and facility space. Use your EOS Accountability Chart to explicitly map out what roles, functions, and headcount actually touch the product line. Determine whether specific team members will transfer with the carve-out or remain with the parent business.

Next, eliminate corporate allocations that will not follow the transaction. Document legitimate standalone operational costs using market-rate contract pricing for functions like cloud hosting, software licenses, and fulfillment logistics. This provides an accurate pro forma EBITDA baseline that neither understates operating expenses nor penalizes the division with arbitrary corporate parent overhead.

Finally, protect the separation phase using a structured Transition Services Agreement. The TSA outlines the specific administrative, technology, and operational services the parent company will supply to the buyer post-closing, complete with fixed duration limits, clear performance metrics, and defined monthly fees. Structuring the carve-out with a detailed TSA and transparent shared-cost bridge allows the buyer to underwrite the acquisition with confidence, preserving an institutional enterprise valuation multiple on the transferred earnings.