Key Takeaways

  • Buyers obsess over customer contracts and top-line recurring revenue while routinely ignoring the shared back-office software that powers the carve-out target.
  • Enterprise infrastructure like cloud hosting agreements cannot be assigned or split cleanly because parent companies run them across multiple business units under single master accounts.
  • Cooley partner Danielle Fortier recalls one live carve-out where the buyer discovered its vendor dependency list was missing 50 separate vendors just days before closing.
  • Separating operational software requires separating mission-critical infrastructure like cloud hosting from discretionary tools like support chatbots before drafting transition service agreements.

The Shared Infrastructure Trap

Private equity buyers running carve-out processes spend weeks verifying revenue retention, customer churn, and IP ownership. They assign junior teams to scrape customer lists and trace code repositories. Meanwhile, the unglamorous back office remains invisible until it threatens closing.

Danielle Fortier sees this blind spot derail carve-out timetables on a regular basis. In technology acquisitions, sponsors assume software tools transfer automatically with the target assets. The reality inside corporate parents is messier.

“What's sometimes less obvious, particularly in tech deals, is all of the vendor relationships that make that work,” Fortier explains. “A lot of those aren't particularly cool or interesting, like a bunch of software tools that are many of which are probably off the shelf that but they all feed into making the business run.”

Because these administrative and developer tools are boring, corporate parents buy them enterprise-wide. A single master service agreement covers five business units to maximize volume discounts. When a buyer carves out one unit, that contract cannot simply transfer to the standalone entity. As Fortier notes, “it's often, particularly on the vendor side, not possible to just say like, well, here have all the vendor contracts that fuel this business.”

The Fifty-Vendor Surprise

When deal teams skip vendor discovery during initial diligence, the bill comes due during transition service agreement negotiations right before signing. Or worse, right before wire transfer.

Fortier points to an actual transaction where late diligence exposed a massive operational hole. “We're a couple days before closing and realized that that list was actually off by 50 vendors,” she says. “A very incomplete list and then you're really scrambling.”

Scrambling days before closing means either delaying the wire or accepting emergency transition service agreements that inflate year-one overhead. Buyers end up paying parent companies management fees to run services that should have been negotiated directly with suppliers. Alternatively, they must procure brand-new enterprise licenses on an emergency basis without enterprise volume pricing.

Triage by Operational Failure Risk

Fixing vendor entanglements requires separating true operating dependencies from peripheral software. A target business can survive day one without a specialized conversational UI, but it goes dark without hosting infrastructure.

“There are many types of vendor relationships that are not mission critical,” Fortier observes. “Like if it's nice to have this chatbot, but the product's not going to totally break if we don't, your cloud hosting relationship you absolutely need.”

Cloud infrastructure sits at the center of this problem. A corporate parent rarely maintains separate cloud environments for each corporate division. Fortier points out that “on the vendor side, you just have your cloud hosting account for example, and that covers all of your businesses. And so, there's work to do there in order to pull it apart.”

If the deal team does not account for that technical separation at the LOI stage, the target enters standalone life with underpriced operating expense projections and broken operational plumbing.

Why It Matters

Corporate carve-outs have accelerated as valuation gaps stall traditional private equity buyouts, but sponsors frequently misprice standalone EBITDA by underestimating vendor separation. When shared enterprise discounts vanish, target margins compress instantly across cloud hosting, security stacks, and administrative tooling. Deal teams that fail to audit vendor entanglements during early diligence will watch their projected operating synergies get absorbed by emergency transition fees and unbudgeted software procurement.