Carve-out & divestment
Maximising value creation from your divestment programme
Valuations – accounting, taxes, and transactions
Every carve-out must be reflected in the GAAP accounting of the companies involved in accordance with the legal and economic structure of the transaction:
Furthermore, every carve-out has tax consequences (or is part of tax planning), for the determination of which valuations must be carried out:
If the carve-out serves to optimise business activities in the current ownership structure, these questions are at the heart of the valuation tasks. In these cases, the valuation methods and assumptions being applied to the carve-out operations, as well as to individual assets, must meet the GAAP and tax law requirements for ‘fair values’ (in several manifestations). In general, the ‘objectified values’ of the relevant professional valuation standards meet this requirement.
However, if the primary purpose of the carve-out is to facilitate a sale or other type of exit for the carve-out business, the question of the transaction price often comes to the fore:
Company valuations are then the central basis for bringing these considerations to a satisfactory conclusion. In this environment, however, the objectified view of a company's value is only one element in the decision-making process. Instead, individual, subjective ideas of the seller and, if necessary, an anticipation of corresponding considerations of the potential buyer now also play an essential role. As a result, the requirements for the company valuation become more complex, require more extensive information or assumptions, and can be met, for example, by scenario models.
In addition, the acting management may also have a need for an external opinion regarding the purchase price, for example vis-à-vis the owners or the supervisory board. This need can regularly be addressed by valuations in the form of fairness opinions. A valuation that takes appropriate account of the relevant future economic scenarios and defines appropriate valuation assumptions is therefore a prerequisite for an economically successful transaction.
Regardless of the specific valuation requirement from GAAP, tax law or transaction-related drive, in the case of carve-out valuations there is often a major challenge in practical implementation: the availability of historical and forecast financial figures for the carve-out operations. As a result of the interconnectedness with other business units, carve-out financials often have to be recreated for the past, since the ‘tailoring’ of the carve-out operations is often not done along established financial reporting structures.
In this context, significant allocation issues can arise if intercompany transactions exist between the carve-out operations and the rest of the corporate group, but also when resources of the corporate group are shared by different business units. However, a reliable valuation can only be made once this information is available. This is why timely initiation of the carve-out process for the financial reporting is of crucial importance. This is not only essential for the company's own valuation considerations, but is also regularly the focus of due diligence exercises performed by potential buyers. A non-transparent set of figures then leads to increased uncertainty on the buyers’ side and, as a consequence, can also lead to value discounts.
Naturally, the Covid-19 pandemic also has a significant impact on the key factors influencing company valuations. In particular, the preparation and plausibility check of forecasts regularly poses major challenges for companies and valuers. At the same time, forecast figures are a key driver of company values. And in this context, each company valuation must, against the background of the macroeconomic Covid-19 consequences, properly reflect the concrete individual subject of valuation. This can only be achieved if, in addition to the preparation of historical carve-out financials, the planning topic is also addressed in good time in the carve-out process.
For more information on carve outs or to discuss how we can help your company, please get in touch with us below.
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