Key Takeaways

  • In a standard equity acquisition, buyers inspect audited financials and lean on high materiality thresholds, but corporate carve-outs collapse when minor vendor agreements and shared productivity tools get overlooked.
  • Danielle Fortier points out that non-material items, such as basic software seats or corporate email access, routinely threaten business continuity if deal teams fail to assign them to asset schedules.
  • Transition Services Agreements (TSAs) function poorly when treated as boilerplate legal exhibits; they require exact scoping of personnel, duration, and service costs prior to signing.
  • Software carve-outs face heightened scrutiny around proprietary code separation, particularly as artificial intelligence tools complicate how teams track shared repositories.
  • Deal teams structure these separations using Cooley's Carve-Out Diligence Road Map to isolate dependencies before setting the LOI.

The Cooley's Carve-Out Diligence Road Map

Step 1: Entanglement and Gap Identification

Drill down on where the target business is entangled with the seller's retained operations. Identify every gap the buyer must fill either through independent commercial contracts or transition services. As Fortier explains: “So much of the early diligence really needs to be focused on, okay, in what ways is this business that we're buying interconnected with the rest of the seller's business and how do we pull that apart?”

Step 2: Side-by-Side Asset and Capability Analysis

Conduct a side-by-side analysis comparing identified operational gaps against the buyer's existing vendor agreements and internal personnel. This comparative audit determines what functions the buyer can absorb immediately or within months post-closing. Fortier frames this phase as “a side-by-side analysis with what the buyer has in terms of contractual relationships, what they have in terms of internal personnel.”

Step 3: TSA Scoping and Schedule Drafting

Isolate the remaining capabilities that the buyer cannot self-fill, establishing specific Transition Services Agreement schedules detailing the exact scope, responsible personnel, duration, and pricing. According to Fortier, “Here's the hole, here's what buyer can fill, and then here's what they can't, and that's what we need to rely on the TSA for. That's where we really get into the nitty-gritty of putting together the TSA and the schedules of the TSA that outline exactly what the seller's doing and how long they need to do it for.”

When This Works (and When It Doesn't)

This framework functions during pre-LOI discussions and early confirmatory diligence. It prevents sponsors from signing purchase agreements with unmapped operational holes, keeping buyers from depending indefinitely on an unmotivated seller. When deal teams use this sequence early, they can price operational friction directly into their opening valuation bids.

It stumbles when applied to rapid fire auctions where sellers refuse to share granular vendor schedules or tech stack architectures before exclusivity. If a parent company runs shared Enterprise Resource Planning instances across ten divisions and refuses to disclose seat-level costs, a buyer cannot run a clean side-by-side audit. In those instances, relying on this framework without seller cooperation creates a false sense of precision, forcing the sponsor to absorb massive true-up costs post-closing.

Why It Matters

Corporate carve-outs continue to offer private equity buyers attractive valuation discounts relative to pristine standalone assets, but those discounts vanish when separation costs explode. When enterprise corporations divest non-core units, sellers want clean exits with minimal ongoing obligations. Buyers who fail to map operational dependencies end up subsidizing the parent company through extended, margin-eroding TSAs. Fortier notes that “there will be inevitably things that are not material in a financial sense, but are still critical to that business continuing on running the way it did pre-closing.” The firms winning in corporate carve-outs treat operational integration not as an execution detail for post-closing, but as the central determinant of purchase price and underwriting risk.