M&A Growth Considerations: Challenges with Carve-Outs and Roll-Ups

Chris Hartenstein, VP of Client Solutions, talks with us about carve-outs and roll-ups, which are two common strategies used in the corporate M&A world. Following is a closeup look at these strategies, including some of the challenges associated with each.

Carve Out: Divesting a Business Line

In a carve-out, a larger company will spin off or divest a line of business out of the existing company typically to become its own new entity.

The carve-out separates completely from the parent company and becomes its own standalone entity. As a result, new company will have to set up its own finance and accounting system so that it can provide financial statements to its new board of directors.

The new entity will typically sign a Temporary Services Agreement (or TSA) with the parent company (or seller) with a defined timeline that’s usually between four and six months. During this time, the parent company agrees to continue to provide finance, accounting and administrative support while the new entity sets up it’s own finance and accounting system.

These new spinoffs face a number of challenges that need to be solved very quickly due to the limited among of time the parent has agreed to support them. These challenges include the following:

  • They must start from scratch with everything this includes recruiting and on-boarding a completely new finance and accounting team selecting and negotiating software agreements for a new ERP, T&E package and any other F&A software that may be needed developing new process and procedure documents for operations, invoicing, AP, payroll and creating reporting and KPI packages
  • The team that is hired probably hasn’t implemented new systems more than a few times in their career and necessitates the hiring of outside consultants to assist with software implementation
  • Internal implementation will take between six months and one year, which may be longer than the TSA lasts.
  • The new entity may be unable to provide basic financial reports on a timely basis.
  • It can be difficult to obtain starting balances and other support (e.g., trial balances, AP and AR, and accrual and prepaid details).

Keep in mind that once the carve-out deal is closed, the seller will not place a priority on providing financial information to the new entity. It becomes “out of sight, out of mind.” Therefore, it’s usually smart to try and negotiate a holdback of some of the purchase price until the transition is complete and all of the financial information and support has been provided.

Roll-up: Acquiring and Merging Similar Businesses

In a roll-up play, a private equity firm acquires multiple small companies that offer similar types of services and have similar revenue streams and merges them together. This allows the firm tobuild economies of scale through a single brand supported by shared sales, marketing and operations to increase the value of the whole.

The acquired companies are usually smaller businesses that sometimes don’t place great value on high-level finance and accounting support. As a result, the accounting team skillsets are often lacking at the companies. There may also be turnover risk at the acquired businesses if employees don’t want to stick around after the acquisition.

Companies may face a number of challenges when performing a roll-up, including the following:

  • Just like with a carve-out, companies have to start from scratch with everything.
  • The staff at the acquired businesses sometimes lack high-level accounting knowledge and experience.
  • Similar to a carve-out, internal implementation will usually take between six months and one year and the new entity may be unable to provide basic financial reports on a timely basis.
  • The acquired small businesses typically use cash basis accounting requiring additional work to move them to accrual/GAAP accounting

Before adding a roll-up, be aware that you may need to convert from cash basis to accrual basis or GAAP accounting. Also be prepared for difficulty in obtain starting balances and other support due to the cash basis accounting. Sometimes the individual businesses and the private equity firm may not be on the same page as it relates to the structure, processes and procedures and reporting.

Both carve-outs and roll-ups will require their own implementation including:

  • Software setup (e.g. Intacct, Nexonia, BILL)
  • Entering prior period data, vendors and employees
  • Training acquired businesses on processes and procedures
  • Setting up consolidations

How Consero Can Help

Consero can help your business with a carve-out or roll-up. We have a set of best practice processes and workflows and dedicated implementation to support the transfer and setup, along with a predetermined integrated tech stack.

We can complete the implementation of a carve-out in a 30 to 90-day timeframe and a roll-up in a 30-day timeframe. This allows CFOs to focus on strategic issues and further acquisition targets. Connect with us to learn more about how Consero’s Finance as a Service solution can help your investment firm and your portfolio companies: https://conseroglobal.com/request-a-consultation/






Consero FaaS: Disrupting the Outdated Traditional F&A Model

  • Cash to GAAP conversion
  • Clean-up work
  • Interim oversight & support
  • Accounting software Implementation

Build it Yourself Solution

  • CFO / Interim CFO
  • Consultants / VARs

Consero FaaS Solution

  • CFO / Interim CFO
  • or Consero Interim CFO
  • Consero Setup/Transformation
Ongoing F&A
  • Monthly financials
  • Daily accounting support
  • Management reporting
  • Integrate add-on acquisitions

Build it Yourself Solution

  • CFO
  • Controllers & Accounting Team
  • Enterprise Accounting Applications

Consero FaaS Solution

  • CFO
  • or Consero Fractional CFO
  • Consero FaaS Enterprise F&A Software and Services

New PE Platform Investment F&A Challenges

Founder Owned Company Accounting:
  • Existing accounting done on a cash/hybrid basis
  • Run on SMB accounting software and other disparate applications
  • Inability to produce auditable financials
  • Lack of know-how to develop projections & KPIs
  • No consistency/structure to customer contracts
  • Underqualified staff
  • Non-scalable manual processes
Carve-Out Accounting:
  • Required to move off parent company accounting applications in a timely fashion
  • Have to build an entire F&A team
  • No documented operational policies and procedures
To Optimized Finance & Accounting:
  • Monthly financials available in 5-10 business days
  • Audit and diligence ready support details
  • Integrated enterprise grade accounting software
  • Budget and forecast reporting
  • Business KPIs
  • Efficient & scalable processes for rolling in add-ons