Key takeaways
- Carveouts provide a unique opportunity to evaluate and update outdated or inefficient IT functions and align them with the goals of the business.
- Business continuity is key, so developing a roadmap for investments and resources with thorough scenario planning is critical to a successful transition.
- A carveout provides the opportunity to ensure you have the right leadership team in place to build and articulate the vision and effectively scale the business post-transition.
With the number of middle-market carveout deals rising in 2024, 2025 is poised to be another big year for carveout assets in the business-to-business technology space. Carveouts accounted for nearly 12% of all US private equity buyouts in Q4 2024, the second quarterly increase in a row. The percentage of carveouts as a share of buyouts is now at its highest point since Q4 2016. In this competitive environment, the most prepared assets win.
When undertaking a carveout, there are three important questions private equity operators should ask themselves.
- Is your technology stack optimized?
- Is your corporate IT function able to support the carveout?
- Are the right people in place to lead and champion the transaction?
By addressing these key components, private equity firms can ensure a smooth transition and set the stage for long-term success and growth.
Redesigning the tech stack
Planning for the worst
Building an investment roadmap
Embracing corporate IT
Managing change
Expert guidance for a successful carveout
Frequently asked questions
Redesigning the tech stack
Carveouts offer a prime opportunity to reassess and revamp the technology stack of the newly independent entity. This process allows private equity firms to replace outdated systems with modern, scalable solutions that align with the strategic goals of the carveout. By leveraging this opportunity, firms can enhance operational efficiency, reduce costs, and position the new entity for future growth.
Imagine a retail consumer packaged goods company with an integrated advertising solution undergoes a carveout. Disentangling their technology from the parent company’s systems could pose significant challenges for the merger and acquisition team handling the carveout. To identify dependencies, migrate data, and ensure minimal disruption to ongoing operations, it’s necessary to take a phased implementation approach with rigorous testing and continuous monitoring to address any issues promptly. This creates a smoother transition and allows the company to use advanced analytics and personalized advertising that drive top-line growth.
Scenario planning
A proper carveout strategy isn’t complete without scenario planning. A strategic approach builds in frequent operational and financial data backups, failover mechanisms, and clear communication protocols to handle potential disruptions. By prioritizing disaster recovery scenarios, private equity firms can safeguard the new entity’s operations and maintain stakeholder confidence throughout the transition.
Building an investment roadmap
A comprehensive roadmap outlines the necessary investments in hardware, software, and human resources, along with a timeline for implementation. By clearly mapping out these dependencies and impacts, private equity firms can ensure a seamless transition and avoid unforeseen challenges in the carveout process.
Embracing corporate IT
Although efficiency may not be the first word that comes to mind when you think of “corporate IT,” well-run IT infrastructures are essential during a carveout. A carveout presents a unique opportunity to reassess and optimize the IT function, ensuring it’s not only fit for purpose but also aligned with the long-term strategy of the new standalone entity. Legacy IT environments in larger organizations tend to be complex, fragmented, and optimized for scale—not agility. By streamlining IT operations and integrating managed-service solutions, organizations can accelerate efficiency gains, drive cost savings, and position the new entity for sustainable growth.
Enlisting managed services
For many carveouts, it may not be feasible or cost-effective to scale an in-house IT function. This is leading private equity firms to turn to managed service providers as a flexible alternative, providing portfolio companies with external expertise in specialized areas like cybersecurity, cloud infrastructure, and application management as an enabler to stand up and transition quickly—without inheriting the burden of internal development. Partnering with managed-service providers can enhance IT capabilities, improve response times, and ensure access to best-in-class technology solutions. Through strategic outsourcing, the carved-out entity can focus its internal resources on areas that drive competitive differentiation and growth.
Managing change
During times of significant business transformation, effective change management is essential to ensure a smooth and efficient transition. Effective change management can improve operational and process efficiencies—but if employees are disengaged and overwhelmed by new systems and processes, it can impede progress. Without a clear strategy for managing human and organizational change, even the most well-planned carveout transactions can be met with resistance, leading to inefficiencies and delayed value realization. It takes leadership buy-in, strategic communication, and cultural management to ensure the long-term success of the carved-out entity.
Leadership
Leadership plays a critical role in effectively managing change and aligning new business structures. Identifying and empowering leadership champions who advocate for the transformation helps reinforce its strategic importance and fosters buy-in across all levels of the organization. Leadership must articulate how the new structure supports the company’s growth objectives and simplifies the day-to-day operations for employees. By setting a clear vision and making sure that the talent, technology,, and processes align with the future-state business model, management teams can accelerate time to market and minimize disruptions.
Communication
Effective communication and stakeholder management are the cornerstones of a smooth transition. Employees that are navigating new processes, systems, and reporting structures should feel informed and supported in order to remain productive. Establishing a structured communication plan reduces uncertainty and maintains operational continuity. It is equally important to balance the frequency and volume of these communications to avoid overwhelming employees, ensuring that messages are always relevant and impactful. Engaging key stakeholders early and being transparent establishes trust and can reduce swirl.
Culture
Cultural and operational shifts are inevitable with any major organizational change. New technologies and processes bring shifts in expectations, communication styles, and operational workflows. This is where defining clear expectations around roles, workflows, and performance metrics early can make for a smoother transition period. A thoughtful approach to cultural integration—by proactively acknowledging and addressing employee concerns—can accelerate create long-term success for the organization.
Expert guidance for a successful carveout
Successful private equity carveouts hinge on effective preparation strategies. By focusing on comprehensive technology stack redesigns, corporate IT efficiency, and effective change and talent management strategies, business-to-business technology companies can maximize success and minimize disruption during the carveout process. To connect with a private equity expert for additional expert guidance on navigating carveout transitions, contact us today.
Frequently asked questions
Q: What should private equity operators consider when preparing for a carveout?
A: In the leadup to a carveout, there are three key questions private equity firms should answer: is your technology stack optimized for this transition, is your IT capable of supporting a carveout, and do you have the support of leadership in this transaction? It’s a great time to make a critical assessment of the company’s systems and culture and adjust them if necessary.
Q: How can I tell whether the company’s IT solutions are prepared for a transition?
A: A company may have existing IT functions that are outdated or aren’t agile enough to carry them through the transition of a carveout. Identifying and addressing inefficiencies in IT and aligning them with the goals of the company are critical to the long-term success of the company. If creating or expanding an in-house solution isn’t feasible or cost effective, the flexibility provided by managed services could be an effective alternative.
Q: What strategies are there to position talent for a successful transition?
A: Communication and culture are key, so effective leadership is critical to aligning talent with business objectives during a carveout. Leadership should have a clear vision of the company’s future and be able to communicate that vision to keep talent engaged. This may require some cultural adjustments, in which case transparency about expectations are critical.