Carve-outs in a challenging economy: what smart sellers are doing differently
February 2026 | TALKINGPOINT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
February 2026 Issue
FW discusses carve-outs in a challenging economy with Mala Shah, Tom Morris, Amy Bishop and Gurjit Garcha at KPMG in the UK.
FW: How is the current macroeconomic environment influencing carve-out strategies?
Shah: Current slow growth, political uncertainty and financial pressures are causing businesses to continue to look at their portfolios and consider what is core to their strategy, but also to consider who is the best owner of certain parts of their business where they are not maximising value. While historically, organisations may have looked to sell to ‘strategics’, they are now assessing other ways of exiting, whether that is by using financial investors, going into a partnership or joint venture with another party or parties, or by listing. No one route will be the answer for every business, and none are easy – they each bring their own challenges to drive value. However, the sellers that are successful are presenting a robust and compelling equity story, including value-upside opportunities through early separation planning and bidder engagement, and ensuring that they can prove the sustainability of the standalone organisation.
Morris: The current macro-environment, and specifically the higher cost of capital, is causing increased scrutiny on carve-out costs and technology complexity, as this has historically been one of the most challenging and costly areas to execute. Experienced sellers are focusing on proving that carve-out assets have a clear, achievable path to standalone viability. This manifests as sellers are looking to deliver enhanced levels of planning, both before and during the deal process, to ensure they can withstand the enhanced scrutiny from buyers without suffering an impact to deal value. Additionally, by proving standalone viability, sellers can diversify the bidder pool to both corporate and financial buyers.
Bishop: From a people perspective, there is increased scrutiny on people-related costs and efficiencies. Buyers and sellers are evaluating employee-related costs in much more detail, including severance packages, retention bonuses and compensation requirements, as these can significantly impact the transaction’s valuation and future cash flows. In addition, businesses are looking to optimise and simplify their operating model earlier, driving headcount and organisational design changes that are agile and lean. A carve-out can be an opportunity for HR transformation, allowing companies to rethink their operating model and organisational design, consolidating policies, programmes, systems and processes to better support the new business.
Garcha: The current interest rate environment, inflationary pressures and broader uncertainty due to tariffs continue to impact the way sellers approach carve-outs. Interest rates remaining elevated relative to historical levels has led to a higher cost of capital, requiring those pursuing a carve-out to provide more clarity on value creation and the ways in which assets can be enhanced under new ownership, to assist the buyer in meeting higher return on investment (ROI) or investment hurdle rates. Sellers have also become mindful of investment committee approvals being more challenging to secure for private equity (PE) acquirers. To de-risk this, there has been greater emphasis on presenting the financial performance of carve-outs on a pro-forma basis. This illustration incorporates risks and opportunities, tailwinds and headwinds such as tariffs, inflation and potentially favourable legislation. Ultimately, this has allowed sellers to assess perimeter profitability on a go-forward basis and consider the level of attractiveness for a buyer, in advance of undertaking a fuller process.
“PE buyer sentiment remains positive on carve-outs due to the added dimension of being able to create value through the standalone angle, as well as the underlying business operations.”
FW: What are the most common pitfalls you are seeing in carve-out execution today, and how are leading sellers avoiding them?
Shah: Carve-outs can be difficult, as organisations balance ongoing business as usual while separating the business to prepare it for sale. The key pitfall in carve-out execution remains the underestimation of separation complexity and cost. Leading sellers typically present robust financials that show the impact of separation on the target business’s earnings before interest, taxes, depreciation and amortisation. They ensure that cost models are detailed, with assumptions that can be defended through rigorous diligence to avoid value leakage. Separation planning should start early, focusing on key entanglements and building plans that demonstrate risk is minimised. The carve-out should be designed as a ‘fit for purpose’ business rather than a simple ‘copy and paste’, with value upsides clearly identified and supported by a plan to execute them in order to maximise overall value. More experienced sellers have now started to conduct sell-side synergy assessments to prepare themselves for negotiations by understanding the likely areas of synergy for the key buyers in their process. Finally, frequent communication and engagement with key stakeholders is essential throughout the carve-out process.
Morris: The most common and critical pitfall is underestimating the level of technology entanglement. This can lead to significant deal value erosion as well as extended transitional service agreements (TSAs) that can cause both buyers and sellers to have to delay transformation. Additionally, businesses executing carve-outs are at enhanced risk of cyber attacks, and failure to recognise this and protect the business accordingly can cause significant risk. Leading sellers are mitigating this by adopting a strategy where the carve-out delivers a fit for purpose business, not a full copy and paste of what is there today. By utilising software as a service and pre-configured cloud environments, the complexity of the technology migration can be reduced, thereby protecting and enhancing deal value. Some sellers are even executing elements of the carve-out pre deal completion to further derisk the transition, although the benefits of this need to be weighed up against the risk of having stranded costs if the transaction fails to proceed.
Bishop: Underestimating the complexity of disentangling HR functions, systems and policies leads to a lack of clarity on the people perimeter, benefits, payroll and compliance requirements for the carved-out entity, which can create the risk of operational disruptions, resulting in operational disruptions, cost overruns and regulatory non-compliance. Successful sellers focus on ensuring the carved-out entity has a fully functional HR infrastructure from day one, setting up new payroll systems with correct tax and accounting treatment, defining pay cycles, designing competitive benefits packages, and establishing clear HR policies and practices within the first one to three months. A poor employee communication strategy can lead to significant regretted turnover, especially among key talent. Sellers that communicate with employees as soon as the deal is announced, holding regular town halls, sharing frequently asked questions, and being honest about the changes and their impact, will have better retention and positive engagement. Overlooking the importance of protecting culture can create cultural misalignment. The focus on operational separation often overshadows the ‘human side of a deal’. Defining core values and embedding these into everyday HR practices, through leaders actively modelling the desired behaviours, will see a more positive transaction.
“A stable leadership team and retained talent signal to buyers that the carved-out entity can maintain business as usual and continue to operate effectively post-separation.”
FW: What methods are sellers using to identify and divest non-core assets?
Shah: In my experience, mature organisations are getting more sophisticated and systematic in identifying non-core assets. They are data-driven and use their assessments to answer questions such as whether the asset is in line with their strategy, what its performance, growth prospects and competitive position are, and whether it will deliver the ROI they require. They also consider whether they are the best owner for the asset in terms of capability, capacity and ability to unlock value. In addition, they look at the complexity of separating the asset and whether it would be attractive to others. Finally, they assess what is happening in the market, asking if others are selling similar assets and whether this is the right time to sell.
FW: What key themes are shaping transactions in your sectors today?
Shah: The energy and natural resources sector is wide ranging in the types of businesses and assets it includes, and therefore identifying any cross-sector specific themes is challenging. However, one key theme that is prevalent in the energy sector is that you often find complex operating facility carve-outs which require physical separation, permitting changes and requirements for new contractual arrangements. The challenges from an HR perspective can be extensive given the diverse nature of the employee base, from operators through to executives, which includes unions and works councils. All these businesses also heavily rely on IT as the backbone of their organisations. Disentangling IT is often one of the most complex and longest lead time items, which requires a lot of planning and coordination as these systems are often heavily customised.
Morris: In technology focused businesses, the key theme is that both sellers and buyers are looking to assess what the impact of artificial intelligence (AI) will be on their portfolios. Increasingly, if a technology asset does not have a clear moat and is not able to demonstrate that AI will not erode elements of the business, then this will have a material impact on value. Conversely, businesses that can demonstrate significant benefits and upsides from AI are able to command higher valuations.
“The current macro-environment, and specifically the higher cost of capital, is causing increased scrutiny on carve-out costs and technology complexity, as this has historically been one of the most challenging and costly areas to execute.”
FW: What are private equity (PE) buyers demanding differently from sellers in today’s market?
Shah: From my experience, while carve-outs remain attractive assets for PE firms to invest in, they expect more from sellers. This includes providing robust and much more granular information on separation costs to enable them to complete due diligence and valuations. They also look for flexibility of approach, so that the carve-out can be worked on collaboratively rather than solely by the seller using their own method. This is often driven by their desire to integrate the carve-out into another asset, meet specific timelines for taking over the asset, or pursue value-creation opportunities. In addition, they seek different deal structures that allow both parties to execute the transaction, such as vendor financing, contingent value rights and future earn-outs based on operational performance.
Morris: Fundamentally PE buyers are expecting sellers to display flexibility within carve-out processes. They are also demanding that sellers give consideration to delivering a carve-out business that is ‘ready to scale’, rather than needing transformation post the separation process. Additionally, where possible, PE buyers are wanting to see shortened TSAs and accelerated migration plans so they can begin enacting their business plan earlier in the ownership cycle. Finally, PE buyers are placing enhanced scrutiny on any claimed value within carved out businesses being attributed to AI. To be credible, sellers will need to demonstrate measurable profit and loss impact from AI initiatives, rather than just ongoing pilots.
Garcha: PE buyer sentiment remains positive on carve-outs due to the added dimension of being able to create value through the standalone angle, as well as the underlying business operations. However, in today’s market, buyers expect greater granularity of the cost base to be provided, including deeper disclosure of areas such as vacancies and historical cost underspend, for example on capital expenditure. There is also an expectation that the seller provides a more realistic view on standalone costs, to reduce the buyer’s estimation risk. Finally, and perhaps most importantly, buyers also expect a flexible, sophisticated seller mindset and conviction if trying to achieve a stretched multiple. In practice, this translates into a willingness to work with the buyer, risk-share and explore mutually beneficial constructs, such as earn-out mechanisms.
FW: How are sellers leveraging technology and artificial intelligence to streamline carve-out processes and enhance buyer confidence? How can analytics and scenario modelling support valuation and buyer trust?
Morris: Sophisticated sellers are increasingly using technology and AI across the deal lifecycle, with some achieving significant efficiency gains through the deployment of tools and bots. For example, AI bots are being deployed to automate large elements of project and programme management in conjunction with project management software products. These bots are increasingly used to track milestone progress, identify dependencies and drive status reporting with minimal human input, delivering significant efficiency gains and process improvements. Additionally, AI-enabled tools are being used to identify entanglements and provide deeper insights into codebases and applications, which can enhance buyer confidence in both the precision and depth of understanding of the technical estate.
FW: To what extent does leadership continuity and talent retention influence buyer confidence and post-deal value creation?
Bishop: The departure of key leaders and critical talent introduces significant operational risk, as this can disrupt operations and employee engagement, lead to loss of institutional knowledge and negatively impact customer relationships. A stable leadership team and retained talent signal to buyers that the carved-out entity can maintain business as usual and continue to operate effectively post-separation. Having a strong leadership team that can run the business independently post carve-out makes a business more attractive to buyers. Buyers are looking for businesses with a clear growth trajectory, and stable leadership is a key indicator of this potential. Buyers may pay a premium for businesses with strong leadership processes and stable teams, as these intangible assets often increase market value. The cost of replacing key employees can be substantial, ranging from 50 to 200 percent of an employee’s annual salary. High turnover can also lead to missed growth targets and slower-than-expected integration, directly eroding the deal’s value.
“It is important to be flexible in the process, both in terms of the carve-out approach and the deal structure, to achieve the best outcome.”
FW: What advice would you offer to dealmakers looking to maximise value in carve-outs while minimising disruption to the retained business?
Shah: The advice is simple – do not treat the carve-out exercise as a normal project. It is a transformation that requires appropriate time, effort and resources. The focus should not only be on the business being carved out but also on the remaining business to ensure nothing is left ‘broken’. Communication is one of the critical levers, as a lack of communication creates fear and stories that disrupt business as usual and destroy value, so it is essential to consider all key stakeholders. It is also important to have a ringfenced carve-out team and backfill key roles to maintain engagement and morale and avoid slippage and value erosion. Managing the number and length of TSAs is another priority, as most businesses are not service providers for TSAs; ensuring these agreements are critical, appropriately costed and limited to a manageable period is essential. Finally, use the separation to minimise stranded costs, as sellers often overlook this and are left with unwanted costs they must later mitigate.
Morris: My advice would be to move from viewing technology as a source of complexity and challenge to seeing it as a core element of the value-creation story. Dealmakers focus on creating a clear technology perimeter for the carve-out, understanding exactly what is in or out of scope and where the dependencies lie. Engaging technology teams early in the deal process is also critical, as this enables them to shape the separation to specific buyer types or scenarios, thereby maximising value. Another priority is delivering a carve-out business that is ready to operate on a right-sized, standalone basis as soon as possible post-close, which benefits both the seller and the buyer. Finally, it is important to have dedicated teams to deliver the separation, ensuring that core resources are not diverted away from supporting the retained business.
FW: Looking ahead, what factors are likely to influence the success or failure of carve-outs in the future?
Shah: There are a number of factors that are important and will continue to be so in the future. Likewise, how success or failure is measured will differ, whether by value, timing or ensuring no disruption to business as usual. The key is starting the process early, not just for the deal but also for the operational separation. It is also critical to get the equity story clear, credible and backed by a robust set of financials, as this will attract more buyers. Ensuring the carved-out entity is fit for purpose is another priority, including considering AI as part of the operating model rather than assuming the only options are outsourcing or in-housing the capability. There is a need to think about both the carved-out asset and the impact on the remaining business so that the seller is not left with significant stranded costs. Finally, it is important to be flexible in the process, both in terms of the carve-out approach and the deal structure, to achieve the best outcome.
Garcha: I expect carve-outs will always be a key part of the M&A playbook for certain sellers due to their business models and nature of the markets in which they operate. Success may have different definitions, but if we define this as a carve-out being on-time and on-valuation, the most important factor would be advance planning. This will protect value for the seller, with the added benefit of providing clarity for the buyer. Thinking ahead and covering all bases will be crucial, with particular focus on aspects such as stranded costs, an area which is often overlooked but later value destructive for the seller. The approach to entanglement also needs to be multifaceted. Focus is too often on costs but, where relevant, a robust perspective on revenue also needs to be provided, particularly in giving a buyer comfort beyond the initial master service agreement period.
Mala Shah leads the energy and natural resources sector within KPMG’s deal execution team and specialises in large, complex separation and integration programmes. She has over 15 years of experience and is also the separation proposition lead for the UK firm. Her clients range from oil & gas, mining, power & utilities to chemicals, and she spends a lot of time working with clients in the Middle East. She can be contacted on +44 (0)7917 070 533 or by email: mala.shah@kpmg.co.uk.
Tom Morris has over 15 years’ experience in technology mergers and acquisitions, leading the technology M&A team in the UK. He supports complex buy-side and sell-side engagements both pre and post deal. He specialises in cross-industry technology separation and integration, across corporates and private equity (PE). He has also led over 50 technology and product due diligence engagements for PE clients across various sectors, including energy, business services and life sciences. He can be contacted on +44 (0)7917 642 506 or by email: tom.morris@kpmg.co.uk.
Amy Bishop partners with clients on deal execution and strategy & performance transformation from a people/HR perspective. She leads project management offices for complex transactions, plans integrations and separations, and advises on joint venture people strategies. Her expertise includes pre-deal due diligence, organisational design, talent management, leadership assessment, retention strategies, labour relations and employee engagement programmes. She can be contacted on +44 (0)7884 734 374 or by email: amy.bishop@kpmg.co.uk.
Gurjit Garcha is the healthcare and life sciences sector lead partner within the transaction advisory services business in the UK. He has extensive experience in advising public and private corporations on both the buy and sell side, across a range of services including due diligence, bid services (takeover, reverse takeover, and merger and defence of public companies) and synergy assessments. He can be contacted on +44 (0)7824 550 570 or by email: gurjit.garcha@kpmg.co.uk.
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