Carve-out Framework for Delayed Markets | Deloitte US has been saved
Authors: Varun Budhiraja, Kushan Biswas, Cristina Sole Perez
As we enter into a new phase of the pandemic and new challenges emerge, companies are striving to rationalize their business portfolios. For many organizations, this will be an opportune moment for a divestiture, and analysts see carve-out deal value setting a record in 2021 amid strong pricing.1 Some companies may want to shed noncore assets to boost liquidity or to raise capital to redeploy for greater growth. Others may be seeking changes to become more operationally resilient, which is important as organizations grapple with the impacts of COVID-19.
But carve-outs can be complex, especially when the business being sold operates in multiple countries. This is increasingly common: The average Fortune 500 company operates in 32 countries.2 Buyers are going to see opportunities to add new geographies, but they may also face circumstances in which the timely transfer of a carved-out business will be delayed in specific markets.
A range of factors can contribute to this delayed markets challenge. Perhaps the business depends on government contracts, acquired through tenders, that cannot be transferred. Regulatory approvals may be needed—import licenses, for example—before a new owner can sell the product. Distributor arrangements are a common area of concern that may slow a business transfer. In other cases, the legal structure of the acquiring entity may not be appropriate for the market.
Deloitte’s evaluation framework
Across these different scenarios, buyers need a clear structure to help define the most appropriate approach to identify and address any issues stemming from delayed markets. Having a clear go-to-market strategy and integration plan is vital in these cases.
The go-to-market model evaluation framework that Deloitte applies to this process poses two fundamental questions: What is the ability to serve the combined business? And how attractive is the market for the combined business?
The attractiveness of a geographical market is going to reflect projections about the potential revenue and margin there. There may also be more qualitative factors to weigh, such as the level of access to key customers in the market, or the ease of doing business in light of government regulations or other hurdles.
In cases where the market is unattractive and the ability to serve the business is low, then unwinding the business may likely be the best and most feasible option. A more nuanced situation presents itself when the market appears to be unattractive, but the ability to serve it is higher. In such cases, finding the lowest-cost go-to-market model is likely the best path.
When the market is attractive, a closer look at how to serve the business becomes important. One of three main go-to-market models will likely be best to manage the delayed market. It may make sense for the buyer of the carved-out business to simply integrate the activities into its own current operations. Another option would be to stand up a new legal entity that mirrors the seller’s direct structure. A third possibility would be to transfer distributor agreements to the buyer’s legal entity.
Starting from these broad considerations, there will of course be a need for a more fine-grained evaluation process. Deloitte has developed a decision tree approach that ranges from an assessment of in-country assets for the carved-out entity to the cost of a direct sales force to supply chain capabilities in any given market.
Overall, there will be two key reference points for the transition strategy for any specific market. One is the current state of the go-to-market model of both buyer and seller. The other is the desired end-state go-to-market model, which can be decided using the evaluation framework we’ve outlined here.
For more details about delayed markets and our go-to-market evaluation framework, we have developed a longer white paper on the topic.
1. PitchBook, “2021 Private Equity Outlook.”
2. CapRelo, “Analyzing international Fortune 500 companies & global expansion,” April 11, 2019.