We want to sell off our legacy services unit to a strategic competitor while retaining our higher-margin software and consulting business. How do buyers evaluate stranded overhead costs in a partial carve-out, and how do we price the deal?

Question

Tyler Smith · Accepted Answer

Carve-out transactions are rarely valued using simple top-line multiples because shared operational overhead distorts the real profitability of the standalone unit. When you peel off a single division, the buyer is intensely focused on stranded costs: shared administrative, facility, executive, and technology expenses that remain with your retained company after the sale.

If your CFO, human resources director, and software licenses supported both businesses, the buyer will not let you add back those entire salaries to inflate the carve-out division EBITDA. Conversely, your retained business cannot afford to absorb one hundred percent of shared corporate costs once the divested unit revenue leaves.

To price and structure the carve-out properly, execute three strategic moves:
- Prepare a pro forma standalone P&L. Build an Accountability Chart specifically for the carve-out business. Explicitly define what headcount, physical equipment, and software vendors transfer with the sale, and replace shared corporate functions with realistic standalone cost assumptions.
- Negotiate a Transition Services Agreement, or TSA. A TSA allows you to provide back-office operational support, IT systems, and billing services to the buyer for three to twelve months post-close at a markup, typically cost plus ten to fifteen percent. This pays for your retained overhead while you right-size your ongoing company.
- Address IP and brand separation in the V/TO. Buyers discount carve-outs if proprietary software, customer databases, or trademarks are co-mingled. Ensure all assets transferring to the buyer are legally separated into an independent entity well before LOI negotiations begin.

Do not let a buyer price the acquisition as a simple asset sale without factoring in the full value of the transition support you provide.