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Private Equity Carve-Out Best Practices in Finance & Accounting


Monica Neumann

PMP | Sr. Manager - Finance Transformation

In brief:

  • Carve-out deals are on the rise in the M&A space, but they are also becoming more challenging, with fewer resources accompanying the new business from the seller.
  • Labor shortages combined with lack of knowledge and experience make it difficult for buyers to rebuild critical business functions like finance and accounting from the ground up, which can have serious consequences for a newly independent organization.
  • From crafting a robust data migration strategy to seizing the opportunity to simplify the chart of accounts, 5 best practices are essential to a seamless separation of the finance and accounting function.

Carving a business out of a corporate parent company during a merger and acquisition (M&A) is often marketed as buying a “business in a box,” delivering an independent enterprise that can hit the ground running. But that concept can be deceiving when it comes to back office operations, as most or all of the finance and accounting (F&A) team typically remains with the seller after the separation.

And that can leave buyers without the knowledge and experience to build a new finance organization from the ground up: replacing a complex process structure and systems that don’t translate to the smaller enterprise, identifying improvement opportunities, making sure vital information isn’t lost during the transition, achieving synergies if the separated function is integrated into an existing department, and ensuring value realization.

Finding experienced talent to stand up the new organization quickly is also a formidable challenge amid the F&A labor shortage in the U.S., with 89% of finance managers reporting hiring difficulties. At the same time, an urgent need to get out from under burdensome transitional service agreements (TSAs) with the seller pressures the private equity buyer to get the new organization up and running yesterday. 

Carve-outs are on the rise in the M&A space, with the number of transactions announced in the first half of 2023 significantly higher than any of the past five years. But as acquisitions trend smaller in the current economic climate, with fewer resources accompanying carved-out businesses from sellers, separating critical business functions like finance and accounting is more challenging.

5 considerations for F&A carve-out success

A strategic, well-structured approach is key to avoiding the volume of pitfalls that can litter the path to success. Let’s examine five best practices for seamlessly separating the finance function — and why enterprises are turning to strong consulting and outsourcing partners with extensive carve-out execution experience to manage the unique complexities of their transaction, quickly build out new organizations, and perform the heavy lifting required for success. 

1. Negotiate SMEs for the transition

Negotiating with the seller for key F&A subject matter experts (SMEs) to remain in place during the carve-out prevents avoidable confusion, mistakes, and continuity gaps resulting from loss of valuable skills and knowledge.

As you stand up the new organization, a quality consulting partner can help you determine what business processes need to be created anew and which require changes to meet the needs of the smaller entity. They should also drive process improvements like automation, streamlined workflows, and internal controls that increase efficiency and performance while reducing operating costs.

However, an inability to perform detailed walk-throughs of as-is processes with the parent’s SMEs forces your team to build future-state process flows and set up new technology from scratch without a clear understanding of specific business scenarios like unique steps or process exceptions.

2. Prioritize a data migration strategy

Data migration can be the most challenging aspect of a carve-out deal. It requires identification and segregation of data specific to the new entity that’s often entangled across the seller’s systems, validation of data integrity, and compliance with privacy regulations.

Getting this wrong can have serious consequences, with lost data, incorrect balances, or failure to clearly define the new entity’s accounts receivable potentially leading to overpayments, cash flow impacts, and lost revenue.

An experienced consulting partner can help you formulate a thorough data migration strategy, building complete templates and managing execution and testing.

Workshops for reviewing and cleaning collected data are another valuable service, ensuring information is complete, up-to-date, and aligned to new company requirements like revised enterprise resource planning (ERP) fields. Your partner should also build a strategy for managing open transactions like invoices and disputed deductions — helping you collaborate with the seller to resolve as many as possible before the TSA ends.

3. Modernize finance operations with the right ERP

Adding efficiency and automation to business operations through ERP implementation is a top priority for more than half of enterprises this year, according to G2 data — and finance and accounting is the most important function. But sourcing and getting a new system in place quickly can be a big hurdle during an M&A carve-out, creating complexity and delays.

Choosing a consulting partner with the experience to help you select, implement, and test a system that’s right-sized for your business — or maximize the capabilities of a legacy system — is critical to achieving the real-time insights, streamlined processes, and 360-degree view of financial performance that powerful ERPs like Oracle NetSuite and SAP can provide.

Look to a knowledgeable partner to leverage functionalities that realize the full potential of your ERP, like automated vendor portals or optical character recognition (OCR) that automates document processing.

If you opt to build your finance team through outsourcing, leveraging third-party providers with an ERP partnership can help you get new systems up and running quickly while speeding ROI. For example, outsourcers who serve as NetSuite BPO Partners offer clients an attractive, flexible licensing model that enables fast, low-cost, seamless integration of a top-rated cloud ERP that’s right-sized for carved-out, middle-market companies. 

4. Simplify the chart of accounts (COA)

With a complete listing of every account in the general ledger, the COA is critical to providing a clear picture of a company’s financial health. But over time, COAs often become bloated, disorganized, and too complex — making it difficult to glean insights that enable effective decision-making.

A successful carve-out creates a unique opportunity to start fresh with a simplified COA. An experienced partner can help you redesign a structure that makes information easier to understand for your new company, considering the granularity of different dimensions like departments, locations, business units, and brands that require analysis in financial statements and managerial reports.

Your partner should streamline your COA by helping you determine existing accounts that don’t apply to the new business. They should also help manage migration complexities; for example, making sure seller balances stemming from multiple entities are mapped correctly to the new, simplified structure.

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5. Don’t make tax considerations an afterthought

Too often, tax requirements are not fully considered at the start of carve-out transactions, leading to unnecessary fines and penalties if important information falls through the cracks.

An upfront inventory of tax implications is key to avoiding nasty surprises down the road. For example, sellers may have vendor payment data spread across multiple systems, making it easy to omit 1099 tax forms. A quality partner should help you assemble a complete vendor list.

For global entities, that inventory should also extend to information needed to meet country-specific requirements. For example, companies that operate in Latin America face extremely complex electronic invoicing requirements from each country’s tax authorities.

Choosing a partner with experience navigating these challenges can help you assess your new organization’s processes and technology, proactively identifying gaps that will cause e-invoicing to fail and designing an end-to-end solution. 

Why Auxis: Turning your carve-out strategy into action 

Formulating a clear vision of what you need to separate from a seller, as well as the costs, changes, and complexities involved, requires an experienced F&A carve-out management team. A strong consulting partner provides the people, tools, and knowledge you need to set your new organization up for success.

Look for partners with a robust, proven methodology for steering separations across finance tracks and processes, delivering a dedicated project management office (PMO) for managing your project’s end-to-end roadmap. That should include managing risk and regulatory complexities, reaching intended goals and milestones, ensuring workstreams remain aligned toward a common goal, and maintaining real-time visibility into your project.

Exceptional partners like Auxis can also help you turn the carve-out strategy into action, quickly standing up complete teams of optimized, turnkey F&A operations. Ranked a “Major Contender” on Everest Group’s Finance and Accounting Outsourcing (FAO) PEAK Matrix® Assessment, Auxis’ high-performance nearshore outsourcing platform offers the top talent, intelligent automation, NetSuite BPO partnership, and best practices to quickly plug holes in carved-out operations and alleviate hiring challenges — honed by our real-world experience as hands-on BPO providers, industry veterans, and experienced advisors.

Managing the magnitude of an M&A carve-out project isn’t easy, especially while also running the new business. With these and other best practices, an experienced partner can help you strategize a best-in-class approach that leads to minimal business disruption, expedited execution, optimized operations, and value that is captured with confidence. 

Want to learn more strategies for seamlessly carving finance and other functions out of global parent corporations? Schedule a consultation with our carve-out experts today! You can also read our blog for more insights about M&A and finance and accounting outsourcing or read our case studies for carve-out success stories. You can also click here to download a free copy of Everest Group’s Finance and Accounting Outsourcing (FAO) Peak Matrix® Assessment 2023 that names Auxis a “Major Contender.” 

Written by

Monica Neumann
PMP | Sr. Manager – Finance Transformation
Monica leads Finance Transformation Projects, including changes to processes, data, systems, roles, and responsibilities. With more than 15 years of accounting, consulting, and business experience with companies located in the US, LatAm & Europe, Monica has a strong track record leveraging technology to improve processes in the fields of Capital Project Accounting, Accounts Receivable, Accounts Payable, General Accounting & Financial Close, and Indirect Tax. Monica is a Certified Project Management Professional (PMP)®. She holds a dual bachelor’s degree in Public Accounting and Business Administration, and a Master of Science in Accounting from the University of Illinois Urbana-Champaign.

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