Key Takeaways
- In corporate carve-outs, sellers present contribution margin packages that exclude corporate overhead, leaving buyers acquiring what Kevin Gorman terms “something less than a fully operating company from a larger parent.”
- Parent financial models often conceal real costs behind raw entries; Ryan Milligan notes finding formulas with "1,550,000 plus plus" and hardcoded assumptions like a flat "$200,000" for total marketing expense.
- Standard quality of earnings reports fail in carve-outs because accounting firms audit recorded figures, whereas Gorman argues buyers must evaluate “what's not on the books.”
- Critical operational tasks frequently sit with unassigned parent staff, such as a data operations employee discovered weeks before closing who prepared weekly custom reports for a key customer.
The Fiction of Seller Financial Packages
Corporate carve-outs arrive with synthetic numbers. The parent entity controls the historical records, and the target business unit rarely runs on dedicated ledgers. Instead, sellers assemble a pro forma financial package showing an adjusted contribution margin or a customized unit EBITDA. The seller frames the business as a lean machine throwing off steady cash flow. In reality, the numbers scrub out corporate overhead, technology licensing, and operational labor absorbed by the wider corporation.
Gorman points out that at the outset, “the onus is on the seller, the parent, to present you with some sort of financial package that gets to an EBITDA number, a contribution margin number that says this is how profitable this business is.”
Trusting those numbers at face value misprices the target. Milligan highlights that the flaws surface when deal teams inspect the actual financial workbooks line by line. “You start looking in the cells and you're like, 'Wait a second. I see 1,550,000 plus plus, and it's clear that somebody just keyed this in.' Or you're seeing $200,000 hardcoded in, like this is what marketing costs.” When parent finance teams lack clean segment accounting, they hardcode estimates to hit internal carve-out targets. Those hardcoded numbers obscure the cash required to operate the division independently.
Diligence Must Audit What Is Not on the Books
A traditional quality of earnings review verifies historical revenue and expenses. If an expense exists on the general ledger, the accounting firm tests it against invoices and contracts. In a carve-out, that approach leaves a massive blind spot.
The missing items are operational dependencies that never receive an explicit intercompany charge. Shared human resources, corporate legal counsel, customer support tiers, and core IT infrastructure often live entirely at headquarters. Even worse, individual parent employees perform daily functions for the carved-out unit without any paper trail.
Gorman cites a recurring example from diligence: “You've got this guy in data operations who makes this report every week for this really important customer that we found out about a few weeks before we close. There's a bunch of those things that you just don't think about because they're not on the list of the riskiest things.”
If that data operations employee stays with the parent company after closing, the buyer inherits a customer retention problem on day one. Uncovering those ties requires interviewing parent operational teams, tracing technical reporting pipelines, and inventorying manual workflows before setting a final purchase price or signing Transition Services Agreements.
Why It Matters
Sponsors chasing corporate carve-outs often think they are getting discounted multiples on corporate orphan assets. In reality, inflated baseline EBITDA masks true run-rate operating costs. When buyers fail to price the personnel, software, and administrative bloat needed to replace shared parent services, the post-closing margin compression erases the entry discount.