In a buy-side carve-out, a company acquires a business unit that is simultaneously being separated from its former parent. These deals come with complexity and uncertainty—but they also offer a chance to acquire valuable assets with untapped potential. For CFOs, the challenge is to manage financial risks and help turn that potential into lasting value.
Due diligence is just the starting point for CFOs in these deals; the real complexity often comes afterward. Finance leaders must identify “dis-synergies” and potential stranded costs that can erode value if left unaddressed. Then they have to keep these challenges in mind as they pursue two of their most critical tasks in a buy-side carve-out. First, they have to build flexible financial models that can adapt as new information emerges. Second, they are tasked with ensuring that transitional service agreements (TSAs) are appropriately scoped, priced, and executed to support operational continuity when and after the deal closes. Complicating matters is the fact that financial models for the deal and TSA negotiations influence one another in real time, requiring constant recalibration as assumptions shift.
McKinsey’s proprietary research shows that buy-side carve-outs account for 28 percent of all M&A transactions.1 It is not hard to understand why there is a high interest in these targets: Sellers often divest noncore, deprioritized assets to buyers that are generally in a better position, with a better strategic fit, to reap value from them (see sidebar, “What exactly do we mean by ‘buy-side carve-out’?”).
To be sure, integration planning shouldn’t come at the expense of setting clear financial targets or building detailed synergy plans ahead of close. While functional teams prepare for day one, the central value capture team can begin advancing long-term priorities. CFOs play a vital role in staying focused on the deal’s original value goals while navigating the challenges that most often derail integration efforts.
Synergy issues and stranded costs
One of the CFO’s most crucial responsibilities in a buy-side carve-out is to identify potential dis-synergies and stranded costs. These issues should be surfaced during due diligence but also need to be addressed and mitigated as more information becomes available just prior to deal close and during integration.
Dis-synergies refer to the negative financial or operational impacts that result from separating the business from the seller and integrating it into the buyer’s organization. For example, suppose a buyer is acquiring a yogurt brand from a dairy company. The dairy company buys milk in bulk to produce all its products, so the milk’s unit price is low. If the buyer is not a dairy company and therefore doesn’t buy a lot of milk for any other product it sells, it will likely end up paying a higher unit price for milk. This will affect the real profitability of the business once it transitions to the buyer.
Stranded costs arise when resources inherited from the seller are no longer fully utilized in the new setup. Suppose that same dairy company is selling a piece of equipment it used to make an entire line of dairy products. If the equipment is sold to the buyer as part of the carve-out, the buyer may end up with equipment that is operating at half capacity and at a loss.
Throughout the integration process, CFOs can manage dis-synergies and stranded costs in two key ways. They can continuously pressure test and update financial models as new cost information comes to light, and they can use their financial oversight to shape TSAs that support the deal’s value creation goals.
Getting a clear financial picture
Part of what makes buy-side carve-outs particularly challenging for CFOs and their teams is the difficulty of building an accurate financial baseline for the future combined organization. A seller may prepare the target’s stand-alone financials to be as marketable as possible, potentially differing from the reality of what the buyer is getting. Even months after the deal closes, CFOs often struggle to get a clear picture of the target’s financial performance. For example, a consumer company failed to realize that the seller’s low operating costs were the result of underinvestment in equipment maintenance and logistics. To address existing customer pain points and improve service, the buyer would need to make significant upgrades—resulting in higher ongoing costs than anticipated.
Depending on the separation process’s complexity level and, in particular, the enterprise resource planning entanglement between the carve-out and the seller, the buyer may need to rely on old-fashioned, manual modeling tools—like Excel—to build an apples-to-apples financial baseline.
CFOs can only develop a sharp view of the new company’s full value creation potential once they have confidence in the financial baseline. But in a carve-out, that baseline is often incomplete—the business isn’t a stand-alone entity at the time of acquisition, which is why TSAs are required. While TSA costs can be a moving target, they offer a useful proxy for estimating the costs that are not yet visible in the carve-out’s baseline but that the buyer will ultimately need to absorb.
This baseline model can then be updated as teams gain clearer insight into the asset’s financials, potential dis-synergies, stranded costs, and the evolving terms of TSA agreements. The value capture team—which owns the value creation model—can work closely with functional and business integration teams to ensure the model stays current and that value capture plans and targets are adjusted as needed.
CFOs and their teams can also plan for different financial-baseline scenarios. They can use the flexible model to run “what if” scenarios and to determine how value capture plans and targets would be updated in each case. Scenarios can include additional TSA costs, dis-synergies, or unexpected needs for additional third-party spending, among other issues the buyer might encounter.
Using TSAs to protect continuity and manage financial risk
TSAs are among the most operationally important and financially sensitive components of a buy-side carve-out. They often involve complex interdependencies, rushed timelines, and high dollar values. Despite their temporary nature, they can carry significant consequences for business continuity and the overall success of the deal.
CFOs are typically the final authority on what the buyer will ask for and agree to in the TSA contract. They must judge which services truly warrant inclusion, how long they should last, and how much they’re worth.
Consider what can go wrong when an important TSA is overlooked: One acquirer opted not to use a TSA for payroll and onboarded all employees from the acquired company on day one. But key dependencies around system requirements were missed, leading to payroll failures and widespread employee dissatisfaction in the first pay cycle after closing.
While TSA costs eventually disappear, they’re often replaced by new cost structures on the buyer’s side, making the financial baseline a moving target. Gaps in identifying entanglements, scoping and negotiating TSA terms, implementing the agreements, or exiting them on time can lead to more than just operational disruptions. They can have a direct and meaningful impact on the CFO’s ability to deliver on the deal’s value creation goals.
CFOs contribute to the following four main phases of the TSA life cycle.
Set the scope and priorities for TSA coverage and spend. In most cases, the buyer will need a TSA to gain access to people, services, or systems from the seller for a limited period of time until it can build the capabilities itself. Consider a hypothetical example where a bank is buying a call center unit from a telecom player. In the long term, it will likely make sense to fully incorporate the call center team into the bank, perhaps by moving staff into the bank’s existing call center space. However, the bank might need time to find the proper space to fit the new employees. As a short-term solution, the bank can enter into a TSA with the seller to continue to use its office space until it finds a longer-term solution. The same logic typically applies to corporate-center services (such as finance and HR), contracts, machinery, production lines, and other resources. Returning to the example of the dairy company, the buyer could use a TSA to continue using the seller’s equipment or milk procurement process until the buyer can find a more cost-effective solution.
Other types of agreements and arrangements may also be needed, including a reverse TSA (where the buyer provides services to the seller) or a manufacturing services agreement (where the buyer uses the seller’s manufacturing facilities). For example, an automotive acquirer included a training clause allowing its executives to “phone a friend” (limited to a reasonable amount, such as one hour per week for the first three months postclose) in the event they had any questions for the seller.
Shape TSA terms to reflect the buyer’s true needs and cost structure. By the time the deal is signed, there is usually a first draft of the TSA contract. This draft is typically rushed and completed with limited input from business, functional, and local teams, even though they often have a better understanding of entanglements with the parent business. Once the deal is signed, it is essential that teams work together to finalize a TSA that addresses all the buyer’s needs to avoid any day-one disruptions. At the same time, it’s important for the buyer to stay close to the TSA rationale and pricing, as TSAs tend to be a significant cost line in the P&L.
Clarify how TSAs will be implemented and used across teams. Once there is alignment on the TSAs, specific employees who run the processes should be identified and trained in how to provide or use services across both organizations. There should be an established governance structure and regular meeting cadence to ensure performance tracking, smooth interaction, and a simple way to manage change requests and escalations.
Time TSA exits to protect value and avoid hidden costs. Exiting TSAs in a timely manner can often accelerate value capture efforts and provide short-term profitability uplift. However, exiting a TSA too quickly sometimes leads to business disruptions, creating unforeseen or unnecessary costs. It’s important for CFOs to carefully weigh which TSA exits to prioritize based on rigorous analysis of business risks, opportunity costs, and savings. It is best practice to start developing TSA exit plans long before the deal closes.
Buy-side carve-outs test a CFO’s ability to manage complexity while maintaining a clear line of sight to value. Coping with dis-synergies and stranded costs is essential. It’s also vital to build financial models that can adjust to new information and to ensure that TSAs are properly scoped and structured to support operational continuity without inflating long-term costs. By guiding both efforts with discipline and foresight, CFOs can help ensure that deals deliver on their strategic and financial promise.
