Carve-out sales: selling a unit without losing the rest of the business

A carve-out is a sale of a business unit or product line that's embedded inside a larger company. It's the messiest deal structure in M&A. Everything that's normally separate — legal entity, IP, employees, customers, financial statements, IT systems — has to be untangled before the buyer can take ownership.

We have run carve-outs for promoter conglomerates exiting non-core businesses, for PE-backed platforms divesting underperforming units, and for foreign multinationals selling their Indian subsidiary. Each had the same pattern: the seller underestimated the work by 6-12 months; the buyer priced the complexity into the offer; the gap was the discount the seller paid for not planning earlier.

Worth understanding the mechanics before agreeing to the carve-out structure.

The IP problem

The first question in any carve-out: which IP goes, which IP stays.

In a typical Indian manufacturing or technology business, IP is held at the parent level. Patents, trademarks, copyrights, technical know-how, customer databases, brand names. The unit being sold has used the IP under an internal licence (often informal) but doesn't own it.

What this means at carve-out: every piece of IP has to be allocated. Patents specifically tied to the unit's products transfer to the buyer. Patents that span the unit and the retained business are licensed (with the licence terms negotiated). Patents that don't touch the unit stay with the seller.

The trademarks are harder. A unit operating under the parent brand name typically can't take the brand with it. A new brand has to be created, customer relationships transitioned to the new brand, and the seller's existing brand carved out of the unit's marketing entirely. This is real work — typically 6-12 months of brand transition.

Customer databases — usually shared across the parent's businesses — have to be split. Customers who buy only the unit's products transfer. Customers who buy across products are negotiated. The shared customer list is one of the most contentious items in any carve-out.

Cost of IP carve-out: ₹2-5 crore in legal and IP advisor fees. Timeline: 4-6 months from kickoff to fully papered transfer.

The employee transfer problem

Indian employment law makes carve-out employee transfers slow and expensive.

Under the Industrial Disputes Act, transfer of workmen requires either (a) consent of the workmen, (b) continuity of service terms, and (c) in some cases, government approval. Non-workmen (managerial and supervisory employees) have somewhat more flexibility but still require individual consent.

What this means: every employee who transfers to the buyer needs an individual employment offer from the buyer, accepting the transfer. Salaries, benefits, gratuity accumulation, leave balances — all transfer. Stock options held in the seller's group are typically cashed out at carve-out (seller's obligation) or rolled into a new buyer-side plan (buyer's obligation, requires consideration).

Employees can refuse the transfer. Those who refuse stay with the seller, who then has to absorb them into other businesses or pay severance. Severance under Indian law (15 days per year of service, minimum) plus notice plus gratuity adds up.

Strategic complication: the unit's key people. The 5-15 senior managers who actually run the business. The buyer wants them. The seller wants them retained through the transition. The transfer happens, but the retention package is negotiated separately — typically 12-24 months of stay incentive, paid by the buyer, post-close.

The slump sale vs slump exchange decision

Tax structure matters enormously in carve-outs.

Slump sale under Section 50B of the Income-tax Act. The unit is sold as a going concern for a lump sum consideration. Capital gains are computed on the difference between sale consideration and net worth of the unit (assets less liabilities). Short-term or long-term depends on whether the unit was held for more than 24 months.

Section 50B has a fixed methodology — there's no item-wise allocation of consideration to individual assets. This is usually tax-efficient for the seller because the gain is calculated on net worth rather than on the FMV of individual assets.

Slump exchange. Same as slump sale but consideration is shares of the buyer rather than cash. Used in stock-funded acquisitions. Tax treatment under Section 50B applies. Useful when the buyer wants to preserve cash and the seller is open to receiving stock.

Item-wise sale (asset purchase). Each asset is sold and valued separately. Capital gains computed item by item. Generally tax-inefficient because individual assets are revalued upward at sale, creating larger capital gains than the net-worth-based slump sale.

Section 50B is the default for most Indian carve-outs. The buyer sometimes prefers item-wise (for clean asset values on their books) but most sellers push back hard. The post-deal tax differential between slump sale and item-wise sale can be ₹15-40 crore on a ₹300 crore carve-out.

Tax counsel runs the math at LOI stage. Worth doing before signing — surprising how often the structure is left to SPA negotiation, when the seller has lost leverage to choose.

Carve-out financial statements

Buyers underwrite acquisitions against historical financials. A unit being carved out doesn't usually have standalone financial statements — its numbers are embedded in the parent's consolidated reporting.

Carve-out financial statements have to be built. The Big Four advisor on the sell-side does the work, typically over 6-12 weeks for 3 years of historical data. Sources include: ERP transaction-level data, allocation methodologies for shared costs, intercompany pricing reviews.

Common issues:

Allocated corporate overhead. The parent allocates corporate costs (CFO time, IT, HR, legal, real estate) to operating units using methodologies that may or may not reflect actual usage. The buyer will dispute the allocation. Negotiation often settles at a 'normalised' allocation based on independent benchmark.

Intercompany pricing. The unit sells to other parts of the parent at internal transfer prices. These prices may not reflect arm's-length terms. Carve-out financials have to restate the intercompany revenue at arm's-length prices, which may be 10-30% different.

Shared cost recoveries. The unit may charge other parts of the parent for shared resources (logistics, factory time, customer support). These recoveries need to be excluded from carve-out revenue and added to costs.

Working capital. Receivables and payables aren't always segregated by business unit at the parent level. The carve-out statements have to allocate or estimate based on transactional analysis.

Carve-out financials are negotiated as much as constructed. The buyer's QoE advisor pushes for adjustments that reduce EBITDA; the seller's Big Four pushes back. The settled numbers typically land 10-20% below what the seller's internal management reporting showed.

The Transition Services Agreement (TSA)

A carved-out unit usually depends on shared services from the parent — IT systems, HR platforms, payroll, accounting, legal, real estate, procurement. These can't all transfer immediately.

The Transition Services Agreement (TSA) governs how the seller continues to provide services to the unit post-close, on a paid basis, for a defined period.

Typical TSA structure:

Scope: Specific services listed (IT systems, payroll, accounting, etc.), service levels defined (uptime, response time), exit triggers identified.

Duration: Most services 6-12 months. Some specific services (specialised IT systems, R&D collaboration) extending 18-24 months.

Pricing: Cost-plus typically. Seller charges the unit a markup of 5-10% above incremental cost. Buyer wants this lower; seller wants this higher.

Exit: Defined termination notice (typically 90 days). Either party can extend by mutual agreement. The buyer can't be locked into using seller services beyond a hard outer date.

TSAs are essential and operationally complex. We have seen carve-outs where the TSA negotiation took 60-90 days and the post-close TSA management consumed more buyer time than the integration itself. Plan for it.

Shared customer contracts

When a customer buys from both the unit being carved out and the parent's retained business, the contract is a problem.

Common patterns: A single master services agreement with the customer, covering multiple product lines. Pricing schedules for each product line. The unit being carved out delivers some products; the parent retains others.

Solutions:

Novation. Customer agrees to split the master agreement into two — one with the buyer, one with the seller. Customer consent required. Some customers will agree; some will use the opportunity to renegotiate pricing.

Subcontract. The parent retains the contract; the buyer subcontracts the relevant products. Buyer has no direct customer relationship. Used as a transitional structure.

Customer transfer. Some customers agree to a clean transfer to the buyer. Pricing and terms maintained. Cleanest outcome where the customer agrees.

Mixed structure. Master agreement retained by seller; buyer's products carved into a separate addendum that transfers. Negotiated case-by-case.

Customer consent rate in Indian carve-outs is typically 70-85%. Customers who refuse consent either stay with the parent (and the buyer loses the revenue) or are negotiated separately. The customer concentration question is critical: if top-3 customers are 40% of unit revenue and any of them refuse consent, the deal economics shift.

The seller's preparation timeline

A clean carve-out runs roughly:

Month -12 to -9: Decide to sell. Internal scoping of what's in the unit, what stays. Tax counsel engaged on structure (slump sale vs alternative).

Month -9 to -6: Begin carve-out financials. Big Four engaged. Allocation methodologies designed. IP allocation worked out. Customer contract review.

Month -6 to -3: Pre-marketing. Carve-out financials finalised. TSA scope defined in draft. IM drafted. Buyer universe scoped.

Month -3 to 0: Outreach. Buyer process. LOI signed.

Month 0 to +4: Confirmatory diligence, SPA negotiation, TSA negotiation, regulatory.

Month +4: Signing.

Month +4 to +8: Closing (with regulatory and customer consent slippage).

Month +8 to +20: TSA period. Buyer migrates off parent services. Customer transitions complete.

End-to-end: 20-24 months from decision to fully separated. Sellers who try to compress this end up either paying the discount or failing to close.

A carve-out priced at headline parity with a standalone business is almost certainly being underpriced for complexity. The seller absorbs the discount somewhere — usually in working capital adjustment, TSA pricing, or escrow size — even when the headline EBITDA multiple looks normal.

What we do at engagement

Three-month pre-marketing phase, longer than standalone deals because of the complexity.

Month 1: scope the carve-out perimeter (what's in, what's out, customer split, IP split). Tax structure decision. Big Four engaged on financials.

Month 2: build carve-out financials. Draft TSA scope. IP allocation finalised. Customer consent strategy.

Month 3: IM, teaser, data room, buyer list. The buyer list is critical — not every M&A buyer wants to take on carve-out complexity. PE buyers with operating teams are typical; strategic acquirers in the same sector are typical; financial sponsors without operating teams usually skip carve-outs.

Then standard sell-side process — outreach, LOI, diligence, SPA, signing. Then 4-12 months of carve-out execution and TSA management.

Carve-outs are real work. The premium for getting them right — in price, in clean separation, in continuing parent value — is meaningful. The discount for getting them wrong is also meaningful, and often invisible until 18 months post-close when the TSA is unwinding and the buyer hasn't built the standalone capabilities.