Buying Carve-outs for Future Exits

In big companies, some business units may not perform well and might be overlooked. It can be helpful for the company to find a more suitable owner for these units. At the same time, buyers can take advantage of these opportunities to improve their businesses and maximize their potential. In this article, we will explore the experiences of Josh Covey, a successful CEO, acquirer, and investor, and Matthew Davidge, co-owner of NBC Affiliate WVNC, as they buy and develop these businesses with the goal of exiting in the future.

"The best time to exit is when someone comes and approaches you and says they want to buy your business.” - Josh Covey

Sourcing Deals

One of the most significant challenges in acquiring carve-out deals is uncovering those underappreciated business units tucked away within large companies. Joe and Matthew have experimented with various approaches, including networking, engaging investment bankers or corporate development executives, and utilizing databases. Nevertheless, they admit that identifying carve-outs can be a time-consuming and unpredictable journey.

According to them, pursuing these unique opportunities demands an entrepreneurial mindset and a readiness to explore unconventional routes. Unlike more prominent corporate acquisitions, these hidden gems require flexibility in deal structure, financing, and deal discovery. Being able to adapt to shifting circumstances and making swift decisions on the fly is essential.

“Sellers have different reasons to sell. And when they're very keen to sell and sales price maximization is not their goal, speed and certainty to close is high on their mind.” – Matthew Davidge

Speed on Deals

When acquiring a business unit from a large company, they believe that there are minimal chances of encountering surprises. Large companies have extensive legal and accounting teams in place to ensure that everything is on board. This is why their diligence is fast, allowing them to buy businesses even when they are not the highest bidder. 

They also highlight the benefits of having a small team running the deal, as they are all on the same page and can quickly make decisions without getting bogged down by too many conversations. 

Timing on the Exit

The best time to exit a business is when someone approaches to buy it. They also emphasize the importance of having an internal time clock, setting a target exit date of five years after acquiring the business. This time frame ensures that as an entrepreneur, the necessary steps have been taken to grow the business, and it's time for a better-suited team to take it to the next level.

Collaborate with Investment Banks

Working with an investment bank can be beneficial, especially when it comes to reaching a wide pool of potential buyers. While proprietary deals might be more straightforward, a competent investment bank can ensure the market is thoroughly covered and the best possible deal is secured. However, they also mention that the process with an investment banker can be prolonged, and it's essential to be patient and realistic about the time it takes.

Have a Reliable Attorney

Matthew highlights the importance of having a dependable lawyer when buying or selling a business. Listening to their advice is key, even if they have different opinions. He suggests finding a lawyer who thinks similarly and has many clients, as this shows their experience in the field. While the main terms of a deal are negotiated by the buyer and seller, the lawyer plays a crucial role in handling holdbacks, indemnifications, and escrow amounts.

Advice

For first time acquirers, start small. The first deal often comes with surprises and may not go as planned. It's important not to bet the farm on the first deal and to learn from the experience.

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