Carve-out private equity: how to prepare a non-core division for sale

Portfolio simplification is now structural rather than cyclical. Bain reports that spin-offs and divestitures accounted for more than a third of strategic deal value in the first 11 months of 2025. KPMG’s 2026 global survey finds that 51% of corporate dealmakers expect their carve-out activity to increase over the next 12–24 months, while 55% of PE dealmakers are actively considering acquisitions of carved-out assets. Supply and appetite are both rising, which is why a seller’s preparation, not its willingness to sell, now decides the outcome.

The return record is more sobering. Bain’s analysis of global buyout deals shows that before 2012 the typical carve-out earned an average multiple on invested capital of around 3.0x, well above the 1.8x average for all buyouts. Since 2012 the average carve-out has earned just 1.5x, and the number of carve-outs has declined by around 50% to approximately 15% of the buyout total. The top quartile still earns 2.5x, close to the 2.7x top-quartile buyout average.

For a Head of Strategy the implication is uncomfortable but useful. The gap between the average and the top quartile is the price of execution quality, and buyers know it. A neglected unit is no longer assumed to be cheap; the buyer has to believe that separation will not destroy the value it is paying for. McKinsey’s 2025 analysis notes that about one-third of carve-out deals do not create the value initially ascribed. Bidders have learned from that history and now price the risk in.

A counter-view deserves a hearing. Some sellers argue that falling average returns reflect a crowded field rather than weaker assets, and that a well-run process will always find a buyer. That is true at the top of the market, but the fall in margin uplift from 29% to 2% suggests the cause is structural. If most of the easy margin has already been taken, the remaining value lies in execution, and buyers will pay for execution only where it is demonstrated. Treat market appetite as a condition for a good outcome rather than a guarantee of one.

Boards should also be clear about why the unit is being sold. KPMG finds that more than 50 percent of 2024 carve-outs were driven by a desire to focus on the core, which is a strategic rationale rather than a financial one. A buyer will ask whether the parent is selling a problem or a business that no longer fits. The answer shapes the discount. A clear, credible rationale, supported by evidence that the unit performs well and would grow faster elsewhere, protects the price.

What to do: run the divestment as an operating programme with a named business owner, not as a transaction led from the corporate centre. Before approaching any bidder, write down the three numbers a buyer will test first: standalone EBITDA, one-off separation cost, and the duration and cost of transitional services. If those cannot be stated within a range both sides can defend, the unit is not ready to launch.

The historic carve-out premium came from operational improvement. Bain finds that in the pre-2012 period carve-outs boosted revenue and margins by 31% and 29%, respectively. Those numbers have slipped to 17% and 2% since 2012, and multiple expansion has fallen commensurately. Neglect by the parent was once a reliable source of easy margin. Competition among sponsors and better portfolio management inside corporates have removed much of it.

This changes the logic of the sale. A buyer that expects little free margin will not pay for a growth story that depends on investment the parent never made. It will rebuild the numbers: strip out allocated central charges, add the real cost of running the business alone, and then test whether the remaining earnings justify the multiple. McKinsey’s 2025 work identifies five operational levers that buyers and sellers can use in negotiation, which shows how finely value is now argued.

The implication for the equity story is that it must move from an attractive asset to a provable plan. Assertions about cross-selling, pricing power or procurement savings carry little weight unless the seller can show the baseline, the owner and the timing. Buyers also discount heavily where shared customers, shared contracts or shared people make it unclear which revenues actually transfer on completion.

Management credibility matters as much as the model. A buyer can accept a conservative standalone forecast from a team that explains it confidently, and will reject an ambitious one from a team that cannot reconcile it to the ledger. Where the division’s leaders have spent years inside a corporate structure, they may have little experience of treasury, tax or procurement in a standalone company. Identifying those gaps, and showing how they will be filled, is part of the proof a sponsor looks for before it commits capital and a management incentive plan.

What to do: build a bottom-up standalone P&L reconciled to the parent’s management accounts. Separate what the unit earns today, what it would earn under independent ownership and what needs investment to get there. Give the buyer a version of this that can be verified, because a number the bidder can check is worth more than a larger number it must take on trust.

Europe is where most carve-outs happen. KPMG’s 2026 analysis counts 40,776 carve-outs worldwide between 2022 and 2024 and attributes 15,422 of them to Europe, ahead of 13,154 in Asia and 8,812 in North America (regional counts are read from KPMG's charts and sum to the total). It also finds that the Consumer and Industrials sectors accounted for 40 percent of global carve-outs over the period, and that more than 50 percent of 2024 carve-outs were driven by a desire to focus on the core.

The surrounding European buyout market has recovered. Bain’s Europe factbase reports that investment rose 11% to $235 billion in 2025 and that exits rebounded 64%. The same data shows the average holding period at exit nearing about 7 years against about 5 years in 2010. Sponsors are holding assets longer and are therefore under pressure to find new platforms, and carved-out divisions with a credible add-on logic are one of the few sources of fresh, proprietary supply.

The implication is that a European seller is not short of interested sponsors, but it is short of buyers who will accept open-ended separation risk. Sponsors with portfolio companies in the same sector can absorb back-office functions and may pay for that synergy. Others will demand a larger price adjustment for the same complexity, so the identity of the buyer matters as much as its price.

Cross-border complexity compounds the problem. European carve-outs frequently span several jurisdictions, each with its own employee consultation, tax and regulatory requirements. These add time rather than cost alone, and time is what a buyer financing the deal with debt is least willing to give. A seller that has already sequenced the countries, identifying those that can transfer on day one and those that need a deferred closing, gives a bidder confidence in the timetable and removes a common reason for a late price renegotiation.

What to do: map the buyer universe by capability, not just by capital. Identify sponsors with an adjacent platform that can host finance, procurement or technology on day one, and those that have run comparable separations before. Test early, and in confidence, whether the unit’s European footprint will need local entities, local transitional services or deferred closings in some countries.

Standalone cost is where most carve-out prices are won or lost. KPMG sets out the arithmetic plainly: every dollar of recurring cost transferred to the carved-out company reduces the sale price by the exit multiple, for example 10x to 12x. By contrast, retaining that cost in the parent, even if it becomes stranded, might only cost 1x to 2x to fix through restructuring. KPMG calls the 8x-10x spread between the cost to fix and the value created the arbitrage.

The same logic works in reverse. KPMG notes that every dollar of EBITDA improvement in the carved-out business can be worth 10-20x in deal value. A seller that removes a dollar of cost before launch captures a multiple of that dollar in the price, whereas a seller that leaves the cost in place hands the buyer the improvement, and the buyer will discount it.

The implication is that allocated cost is the weakest number in a management pack. Corporate allocations rarely reflect what a buyer would pay for the same services on the open market, and sophisticated sponsors know it. Buyers also know that a division often depends on central functions, such as IT, treasury and legal, that were never costed for a stand-alone business. The sellers who win are those who show the true cost first.

Pitfalls recur. Sellers often present a low standalone cost by omitting functions the unit currently receives free, such as group insurance, treasury or cyber security. Buyers find these in diligence and respond by adding their own estimate, usually conservative, and by asking what else has been missed. A credible standalone cost includes a contingency and says so. It is better to present a slightly higher, defensible figure than to be corrected on a lower one, because every correction invites a request for a price adjustment elsewhere.

Disputes over standalone cost usually arise from a lack of shared definitions rather than from bad faith. Sellers and buyers often count different items: one includes group-level insurance and audit, the other does not; one treats recurring technology licences as capital, the other as operating cost. Agreeing a common cost taxonomy early, and applying it to the baseline, the plan and the TSA alike, removes a frequent cause of late-stage renegotiation and keeps attention on the commercial case.

What to do: replace allocations with quoted market cost for every shared service, challenge each item, and decide which costs stay in the parent and which transfer. Where a cost will be stranded in the parent, plan its removal on the parent’s account and on the parent’s timeline. McKinsey’s 2013 divestiture research found that parent companies can take one to three years to recover, so stranded cost left unmanaged is also a cost to the seller.

Transitional service agreements are usually treated as a legal annex. In practice they allocate risk and cost between buyer and seller for the first months of independent life. McKinsey’s 2025 review notes that the new owner of a carve-out is often required to build a stand-alone company within six to 18 months, which is the real clock on every TSA. It also notes that penalties can reach as much as two months’ cost of the TSA when service levels are not met.

Cost allocation is equally negotiable. McKinsey observes that stand-up cost may be divided 75/25 percent or even borne 100 percent by the buyer. A buyer who expects to carry the full stand-up cost will lower its bid by that amount; a seller that offers to share it, or to deliver parts of the separation itself, can hold the price. The headline offer is only the first part of a bid; the TSA and stand-up terms decide how much of it the seller keeps.

The implication is that service scope, pricing, term, exit charges and service levels should be designed by the seller before bidders see them. A vague TSA is read by a buyer as a hidden liability. A precise one, with a clear term, a migration plan for each service and a realistic fee, signals that the seller understands what separation involves and that the first year will not become a dispute.

Technology deserves special attention because it is the commonest source of TSA extensions. Shared enterprise systems, licences that cannot be assigned and data entangled with the parent’s can turn a planned stand-up into an extended dependency. The seller should know in advance which licences transfer, which need the vendor’s consent and what a data separation involves. Where a clean split is impractical, offering a managed migration within the TSA, with defined milestones and a cost cap, is often worth more to a buyer than a promise to be flexible.

What to do: draft the TSA schedule alongside the standalone P&L, with an owner for each service. Price each service at cost plus a defined margin rather than at an open-ended rate, and define the exit path for every system and process. Ask the technology and finance functions, not the legal team, to sign off the service descriptions, because they are the ones who will have to deliver them.

Time is the cheapest lever a seller has. KPMG’s 2026 research describes the best portfolio managers as those who identify candidates 18-24 months early, creating a lead time to fix stranded costs and lift EBITDA before the sale process starts. Its example allocates 18 months to specific efficiency levers such as product range rationalisation and overhead reduction. A seller that begins at launch gives up that time and the price improvement that goes with it.

Early work also reveals whether the unit is separable at all. Shared systems, shared contracts and shared sites determine how many services require a TSA and how many require a build-out. Bain’s guidance for buyers of carve-outs makes a related point: the business can break on Day 1 if things are not planned and managed well, and a smooth cutover is only the beginning. A seller that has solved Day 1 in advance is far more credible.

The implication for the corporate is that readiness is a decision about sequencing, not a decision about effort. Work that is done before launch, such as clean entity structures, assignable contracts and a verified standalone P&L, reduces risk for every bidder at once. Work left until after signing becomes a price adjustment or an indemnity. The first is under the seller’s control; the second is not.

Governance is the quiet determinant of timing. Separation programmes touch finance, technology, HR, legal, tax, procurement and operations, and each has competing priorities. Without an executive sponsor who can resolve conflicts, the programme drifts to the pace of its slowest function. We suggest a small separation office reporting to the CFO or Head of Strategy, with a weekly cadence, a single risk log and a rule that any open item blocking the data room is escalated within a week.

What to do: set a pre-launch programme with milestones tied to the sale timetable. In the first six months define the perimeter and the standalone P&L; in the next six agree the TSA design and start removing stranded cost; in the final stretch prepare the Day 1 plan and the buyer-facing package. Review the programme at board level, because most delays come from decisions that sit outside the divisional team.

A private equity sale is one route among several. KPMG’s 2026 research identifies four strategic race plans and eight forms of carve-out structure, from a full sale to a part-sale in which the seller keeps a stake, to a listing of a minority holding. Bain separately finds that sales to strategic buyers grew 66% in 2025, so corporate acquirers are active competitors to sponsors for the same assets. The choice of route is therefore a strategic decision, not a process detail.

Scarcity helps the prepared seller. AlixPartners reports that the US corporate divestiture count dropped from 1,050 in 2021 to 720 in 2025, annualised from the first quarter. With fewer assets reaching the market and 55% of PE dealmakers considering carved-out assets, a unit that arrives with a costed blueprint is likely to attract competitive tension, while one that arrives without it competes mainly on discounts.

The implication is that route selection should follow from what the blueprint reveals. A unit with high stranded cost and heavy shared infrastructure may suit a strategic buyer that can absorb it. A unit with a clear standalone case and an experienced management team may suit a sponsor. A unit whose value depends on the parent’s relationships may justify a retained stake. The decision should be taken on evidence by the board, not inherited from the adviser’s default.

Employees and customers deserve attention in the route decision. A sale that leaves the unit’s people uncertain for months risks attrition among the managers whose knowledge the buyer is paying for, and a sale that alarms customers can erode the revenue base before completion. Communication plans, retention arrangements and early customer conversations, handled within the limits of confidentiality and competition law, are part of preparation. They also influence price, because a buyer will normally price attrition risk into its bid whenever the seller cannot show it has been managed.

What to do: run two or three route options through the blueprint before choosing. Compare the net proceeds after stranded cost, TSA terms and retained liabilities, not the headline price. Keep a credible alternative alive, whether a strategic sale, a part-sale or retention, until signing, because a seller with only one option negotiates from weakness.

Karter McKinley supports corporate development teams with M&A and divestiture preparation: building the standalone view of a division, structuring the separation plan and TSA design, and coordinating the buyer process alongside the legal, tax and, where required, FCA-authorised advisers. This is information, not advice, and each engagement is scoped separately.