How Private Equity Carves a Business Out of a Company

0:00Kevin Gorman: AI is changing industries so quickly and especially these big public conglomerates are doubling down on their own AI infrastructure. What's the difference between stock and asset deal and particularly with carve-outs? If it's a stock deal, that means there's an entity. From an asset deal, you're starting from zero.

0:15Ryan Milligan: There's this concept of like zero-based budgeting that you kind of bring to a carve-out because you're forced to look at every contract, every asset, every liability so specifically and just kind of ask why. What are the two acquisitions that were carve-outs that you've done the last couple years?

0:29Kevin Gorman: The management team was focused on building out a bunch of their products around their own consumer database. And we met them at the right time and had a good reason to buy it, largely driven by AI and our own capabilities. And that market, same thing, was changing very dramatically with what AI can do in terms of collecting data and giving data to customers, which created the opportunity for us. Is there an early tell that the carve out is going to be harder than it looks?

0:56Kevin Gorman: It's not venture capital. It's private equity. It's the private equity funcast. Pour yourself a drink and have a seat.

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1:43Ryan Milligan: NetSuite is customized for a wide range of industries, so it supports the way your business truly works. Whether your company earns millions or even hundreds of millions, it's time for NetSuite Next, where your business meets AI. For the first time ever, you can try NetSuite Next for free. Go to netsuite.ai slash funcast. Built for every industry, ready for every boardroom. netsuite.ai slash funcast. Welcome. I'm Ryan Milligan, and I'm happy today to be joined by Kevin Gorman, who also goes by KG here at Parker Gale. We're going to talk about corporate carve-outs today, which are a really interesting way to get deals done in private equity.

2:22Ryan Milligan: This is meant to be a corporate carve-outs 101 discussion. KG's perfectly equipped to talk to us about this today because he's actually completed two of them over the last couple of years. and in his investment banking career, he actually completed a very complicated one as well. We're going to talk about what they are, why people do them, why they're interesting, and also, most importantly, why they're so darn hard. So happy to have this discussion today and welcome, Kevin. Happy to be here. So why don't we start off with this? Let's just talk about, assume somebody doesn't know what a carve out is, like what is it?

2:55Ryan Milligan: Let's get the 60 second version of what is it? Why do you do it? What's it all about?

3:00Kevin Gorman: Yeah. So you're buying the division or a business unit of a larger parent organization. And it can be 99 % of a fully functioning company, but it's something less than a fully functioning company on its own. And during diligence or the puzzle you have to figure out is how much less of a company is it? 50%, 75%, 99%. What are the areas of shared service or dependencies that you're going to have to operate on a standalone basis? but inherently it's you're buying something less than a fully operating company from a larger parent, which tends to be a business unit, a product line, a set of customers.

3:38Ryan Milligan: So let's talk about why somebody would do this. So you're talking about a bigger business selling a smaller business. Why would somebody do that? They're in that business. They might've even bought it at some period of time. Like why exit? Why would you get out of that business?

3:51Kevin Gorman: Yeah, there's a bunch of different reasons. So it could be this, something in the market has change and this product is going a different direction than the core business. Before you bought it, it could be serving a different market. So maybe you serve law firms and you bought this business that does accounting or you have a business unit that sells to accounting firms and that is becoming less core. But ultimately, and you've built a management team around law firms and they're not experts in accounting. So ultimately, you are not focused allocating resource to this business, its growth, however good of a business it is, is less relevant than whatever core business you have.

4:30Kevin Gorman: And there's a couple of different benefits you get as the parent. You get some liquidity if you want to deploy it to your core business. If you want to do a dividend to shareholders, keep it on the balance sheet, do more M &A that's more in your core. But there's a bunch of different reasons why a parent would ultimately decide to do it. Yeah.

4:46Ryan Milligan: And there's some hope that we can go like one high profile one that happened the last couple years. Boeing's a company that everybody knows. And they sold what was called their digital aviation solutions business to a private equity firm. And I think that was kind of twofold. One, it was, I think you use the words resource allocation. So they could pay down some debt, they can raise some cash, a lot of cash, they can deploy that against their core businesses. And sometimes, you know, there's been a lot of M &A activity for a long time and things change over time and people decide, I want to double down on this and stop doing this.

5:21Ryan Milligan: And if you sell this, then you can allocate those resources somewhere else. And then maybe there's a buyer that sees that opportunity and they can do more with it. So it's just kind of this reshuffling of the deck over time strategically that people can do. I also think, let's talk about AI a little bit. I think AI is going to, more of these have been happening. And I think AI is one example of why, but can you think through some reasons why AI would be helping drive corporate carve-outs?

5:47Kevin Gorman: Well, AI is changing industries so quickly, and especially these big public conglomerates are doubling down on their own AI infrastructure, and there may be an application that requires a ton of capex or investment that they need to make to protect their core business, and then these ancillary business units become a way to go fund those investments, or those ancillary industries are changing so much because of AI and they're not suited to be the one to invest in them or keep them well positioned in their own markets. So they need to, you know, have a change in ownership who someone suited better to respond to all the changing environments of AI.

6:24Ryan Milligan: Yeah. And I think as well, you know, there's lots of data and processes in a business and there's differing levels of AI capabilities and other businesses. So that, you know, let's name a few that we've done the last year. So what are the two, what are the two acquisitions that were carve-outs that you've done the last couple of years?

6:39Kevin Gorman: Yeah. So a couple of years ago, we bought a business from a large family-owned conglomerate. This was a small technology business in a broader portfolio of real estate printing, billion-dollar-plus business. And this business's market had changed significantly because of COVID. So similar to AI, like the market changed completely. A part of the business took off that they weren't expecting. And while it was growing very fast, performing very well, it was still, again, that business doubling means less than a couple percent extra growth on their core business. So ultimately, it was best for them to find a new owner.

7:20Kevin Gorman: They still believed in a ton. They actually ended up rolling quite a bit of their own equity. So it was ultimately an attention and focus and resource allocation from a large billion-dollar parent organization that wasn't the right owner at that point for a small sub -$50 million software business. Yep.

7:39Ryan Milligan: So that's one. And then we also bought a company more recently that we've talked about called Peer Media. Why don't we talk about that one a little bit?

7:46Kevin Gorman: Yeah. So that was more of a case of different products in different markets. So the parent organization, Mintel, is a big consumer data and insights business and research business. And this business was more selling to the enterprise and collecting enterprise data on advertising, what channels are people targeting, where is spend going. And they were predominantly focused on financial services, telecom, and insurance, whereby the broader Mintel portfolio is more CPG, consumer, retail, travel, and leisure. From both those perspectives, it was less core. And again, the management team was focused on building out a bunch of their products around their own consumer database.

8:27Kevin Gorman: And we met them at the right time and had a good reason to buy it, largely driven by AI and our own capabilities. And that market, same thing, was changing very dramatically with what AI can do in terms of collecting data and giving data to customers, which created the opportunity for us. And we were a good owner for the business.

8:48Ryan Milligan: Yeah. So two very different reasons. But I guess they have some similarities as well. But just in summary, one is just a matter of scale and focus. Yep. Right? It matters more to us as the owner than it mattered to them. will give it the focus and attention it needs to grow exponentially. That's one. The other one, just different end markets. One side of a conglomerate grew a lot. This other one was kind of just hanging out there. We have a bunch of AI capabilities over here that can help progress that business. So we do that deal, grow that business. They get to refocus their business and redeploy those resources.

9:22Ryan Milligan: And this kind of reshuffling of the deck allows both. That's really a win-win scenario. But let's talk about this next. It's a lot of work to get it done. So first, let's just talk about, you know, where do you start? So I would assume if you're doing a carve out, it's coming down like there's a price, right? To get to a price, you got to start from some numbers. But these are businesses that are both combined and need to be separated. So again, we talked about there's been a ton of M &A that's gone on over the last 20 years, and lots of businesses have gotten bigger by doing acquisitions. And a big part of doing acquisitions is realizing synergies.

10:01Ryan Milligan: What are synergies? That means that you've got shared services and there's one back office and there's different ways to cross sell and help each other's customers or take data from this business and sell to this business or data from this business, sell to this business. So like all these different things that you get excited about actually become the complexity that emerges when it's time to separate them. But you start with some level of numbers. Why don't we just talk about that? How do you start to get your head around what is this thing and what are the numbers and what might it be worth?

10:34Kevin Gorman: Yeah. So you need to define what are the parameters of this transaction? What are you buying? And ultimately, at the beginning, the onus is on the seller, the parent, to present you with some sort of financial package that gets to a, whether it be an EBITDA number, a contribution margin number, that says this is how profitable this business is. This is what the revenue you will get as part of this transaction is. And then in that, you can find the sticking points of where the shared services will be or where the allocations are. If they've got a 1 ,000-person company and there's 50 people that are associated with the one you're buying, you're going to get X percent of this big bucket of costs.

11:16Kevin Gorman: Then you've got to dig into all that. But you're starting with this contribution margin or whatever business unit analysis you have.

11:23Ryan Milligan: And contribution margin is kind of before the back office of the business, loosely defined. How much cash flow is that business contributing to the overall business?

11:35Kevin Gorman: And then there's a bunch of different flavors of carve-outs. It could be a holding company where you're buying an entity and they have all the people you need. And maybe there's a little bit of HR and finance shared services, or it could be you're buying a business unit that doesn't have its own entity, but there's these customers and there's certain products and technology and IP that you're buying as part of it. So all that comes through in what you are getting in the P &L. If you have an entity and it's a stock deal, you're kind of starting with something and there's something tangible to build from.

12:07Kevin Gorman: If you're doing just buying assets, you're kind of starting from nothing and building up from there. So there's a bunch of different flavors of carve-outs in terms of what the parameters of the deal are at the very outset.

12:17Ryan Milligan: And we'll get to that in a little bit, and those are the particulars of that. But let's put people in your seat as a private equity investment professional. They're giving you something. They're giving you something probably in Excel. Now, in a perfect world, it's a carve-out, and they're a NetSuite. You know, we use a lot of NetSuite. They have NetSuite. There's a stock entity. They hit a button in their accounting system. NetSuite spits this out. You take a look at it and you're like, here's my revenue. Here's my gross profit. Here's my EBITDA. Great. Let's put a multiple on it and we're going.

12:54Ryan Milligan: Now, it doesn't really usually play out that way in carve-outs, right? So what are you kind of given? What does that look like to you? What are you receiving as a first pass on like, what does this business do from a numbers perspective?

13:06Kevin Gorman: Yeah. So you're getting a revenue. It might be a list of products and associated revenue over time. It's generally easier to find what are the parameters of revenue. You have this many customers associated with this many products. And again, depending on the situation, what it costs to serve those customers. So whether in terms of from a software perspective, it could be technology infrastructure, a support team. If there's services or implementation, what does that team look like? And then when you get down to OPEX is usually where there's the most of these kind of shared services or allocations happening.

13:39Kevin Gorman: So you got to figure out of the people that are employed by this entity or working on this business unit, how many of them are 100 % dedicated and coming with you in the transaction? How many people that are working on the business, whether it be 10 % of their time, 50 % of their time, 75 % of the time, are those people staying or are they coming with you? So you got to figure out all those allocations and what's actually baked into the numbers you're seeing and what is kind of off the books outside of the numbers you're seeing. And you almost have to go due diligence on the parent as opposed to whatever business you're buying.

14:14Ryan Milligan: Yeah. And I think that it's an early tell. I think the numbers can be an early tell of like operationally, where are we really going to have to dig in? So when we went through a recent acquisition, that looked like there's kind of a tab that clearly a human being in Excel opened and started plugging some numbers in. Now, some of those numbers, like revenue and cost of goods and gross profit, might come from another tab that came out of an accounting system like NetSuite. And then you get further down and you start looking. You're looking in the cells and you're like, wait a second. I see$1 ,550 ,000 plus, plus, plus.

14:51Ryan Milligan: And it's clear that somebody just keyed this in. That's just$200 ,000 hard-coded in. This is what marketing costs, I think. Yes, marketing costs were exactly$200 ,000. You're like, okay, sounds like marketing costs is a shared service. That's probably an area of diligence that we're going to have to dig in because they're kind of guessing it. Generally speaking, this is what it does. So that's kind of the starting point. And then, but then you kind of get into this question and answer. That's to me, in this case, we had a business that we were buying this into. So that's when you grab your CEO, your CFO, your CTO, and you basically set up an operational meeting saying like, how do you do this?

15:27Ryan Milligan: How do you do that? How do you do sales and marketing? How do you do marketing? How do you do, you know, what's your engineering organization? What's your back office? And you're basically trying to come up with what is it going to take to run this business going forward? And you want to bring that far enough along where you can reasonably say, I think I'll pay X for that. Is that fair or anything you would add to that?

15:50Kevin Gorman: No, that's right. Ultimately, you come down to I've got this list of customer contracts. I've got this people. I've got these vendor contracts. and I got a bunch of other stuff, shared services that I need to put a number on. And you haven't had the time to do the diligence and go talk to every person on their team who works in finance. How much time do you spend on this versus this? So you're doing a little bit of an estimate. But however much you can bake into the LOI in terms of an exhibit, here's what we think this is. So everybody is eyes wide open on, okay, is this actually going to be off track or on track versus what we thought when we went in?

16:25Kevin Gorman: That's generally the best way to do it. Yep.

16:27Ryan Milligan: I would assume at some point you're going to be thinking through what's coming with us as the buyer, what's staying with you as the seller, and what's going to have to transition over some period of time. When you get into that, is that kind of up front? Is that coming later? But just how do you work through all of those things?

16:47Kevin Gorman: Yeah, I think there's big stuff that you can identify up front. Like if there's shared customers or there's shared infrastructure, like the big dollar buckets of costs, particularly to run a software company, are known entities that's going to be hosting and things like that. So if you don't see those on the P &L, that's something definitely to figure out before. But otherwise, yeah, you're kind of putting things in big buckets, making a few assumptions, going into the LOI. And then post LOI, it's lists of every vendor, lists of every person, every shared resource. And you're doing an allocation exercise.

17:24Kevin Gorman: And part of that allocation exercise is you're validating your price. And then you're kind of helping build out the operational plan for actually completing the carve out. Yep.

17:35Ryan Milligan: When you do carve outs, to me, there's a couple different types of risks that exist that don't exist in just a standard buyout. There's the risk of identifying everything that the business needs to serve its customers. And then there's the execution risk of extracting the business and going through that transition. For the former, just about the numbers, which is kind of about the numbers and identifying everything that's needed and making sure that you're aware of it. And then I guess it becomes a legal thing as well. But for that, to you, where does the risk really lie? Is it kind of top line?

18:13Ryan Milligan: Is it expenses? Like what's the risk there of identifying everything as you're working through the business?

18:18Kevin Gorman: Yeah, it's usually on the expense side of things like revenue. You know, you can get every customer contract and tick and tie to what you think, you know, the total book of business you're buying is. But on the expense side, like when you're going to perform a typical quality of earnings report on this business or this entity, they are looking at what's on the books already. But in a carve out, you need to, like you talked about earlier, diligence, what's not on the books, what does this business need that does not appear on the P &L. So you have to ask the right questions to find those expenses, to find those areas of dependency that are going to cost you something when you go run this business on your own.

18:57Kevin Gorman: And that can be a never ending bucket. The more questions you ask and the more people you talk to. Any examples that come to mind of anything like that that came up in any of the deals you were working on? I mean, in our most recent deal, we had a bunch of those where, you know, you got this guy in data operations makes this report every week for this really important customer that we found out about, you know, a few weeks before we closed. So then there's a bunch of those things that you just don't think about because they're not when you're going through like this is the riskiest thing or the most important thing.

19:27Kevin Gorman: But there's all these people that aren't involved in the transaction that are doing maybe one thing a month for this business. but that one thing can be really important. And then multiply it times 100, depending on how big or how many people are involved in the business.

19:42Ryan Milligan: Yeah, or there can be this little piece of technology. It's like, oh, yeah, we run that through this report, and then it spits out, oh, that's on this side of the ledger, and then you have to come up with some sort of game plan to either license that or build it yourself or come up with another business process and that type of thing.

19:55Kevin Gorman: And there's some cases we had where the parent business was actually relying on our people to maintain and manage something for them. So there is kind of became cross services almost. Yep.

20:08Ryan Milligan: Let's talk a little bit about stock versus asset deals. So just that's always a thing. But generally speaking, what's the difference between stock and asset deal and particularly with carve outs? Yeah.

20:17Kevin Gorman: So if it's a stock deal, that means there's an entity which presumably has some contracts and financials running through it. And that's really important in this case because you are starting with something. It may not be everything that is associated with the business, but there may be some customer contracts that are already signed to the entity. So by purpose of buying the stock, you are getting that contract. You don't have to do anything with it. Same thing on the vendor side. Yeah. So that does make it easier. It makes it much easier. Yep. From an asset deal, you're starting from zero. Everything you want has to be on a list.

20:50Kevin Gorman: It's probably with the parent organization entity. that means it has to be assigned to whatever entity you're forming to buy the business or whatever entity you're buying it into which means you have to review every assignment provision and all the customer contracts all the vendor contracts you need and they have to you know all those have to be done or in process you know before you close and you're kind of assessing that risk as you go but the asset deal you're you're starting from nothing and building a business one contract one person at a time. Yep.

21:21Ryan Milligan: So asset deals, the positives are there's some better tax treatment. Yep. And from a liability perspective, if it's not written into the contract, you don't get it. You don't take those liabilities. Now, at the same time, if the asset isn't written in the contract, you don't get that either. Yep. And every contract probably has some sort of assignment or sale provision that means you You have to go to the other party and get the contract rewritten. So it can be very lucrative to do asset deals, and it can save you a lot of liability. But from a complexity perspective, it's substantial. And that'll be part of the calculus that you're making to figure out, is this worth it or not?

22:04Ryan Milligan: Is this even achievable? Because if there's a certain volume of contracts that would be too burdensome to even get permission on to get a deal done and things like that. So to me, that's the give and take of those types of deals.

22:16Kevin Gorman: There are perks in these carve-outs where, you know, if you do like, oops, I forgot something, you can kind of go back and call the wrong pockets. You can go back and get it. But, yeah, you don't want to be doing that too much. Right.

22:27Ryan Milligan: Okay. So now let's talk a little more operationally. So we talked about numbers. Let's talk operationally. Again, remember, these are businesses that are operating as one-a-day. There's a lot of shared services. There's a lot of combined processes. and you're now going to take a scalpel somehow and figure out what's on each side of the fence post-transaction. So you've got to start somewhere. So where do you start? Is there a meeting? Is there a phone? How do you just really start digging in and laying the framework for how you're going to figure all this out?

22:58Kevin Gorman: Yeah, we started with the operations of, in this case it was the technology and the data operations and all the people that go into serving our customers. and yeah that took the form of a big meeting in this case so that included this was our team at Park Gale our executive team at the our portfolio company the executive team at the parent company the executive team at the business unit we were buying people it at the parent company that were performing shared services on behalf of Compermedia and we actually had one person on our side who we were going to hire to do some of the shared services after closing.

23:36Kevin Gorman: So it was 20, 25 people in a room. There's architecture diagrams on whiteboards across the room. And I think ultimately we decided to go one by one, starting with what's going to be the hardest thing on this deal. And we went through the top six or seven of those over the course of five, six hours. Our goal was to walk out of that meeting thinking this is feasible at a level of risk we can tolerate. And it was lucrative enough in terms of what we could do with the business that made all of that worth it in the end.

24:14Ryan Milligan: And I think the other thing you're always looking for in those instances is timeframes. So you said feasibility and at what cost and at what period of time. because yeah I think for us whenever you're doing a carve out like this your true north for what you're kind of solving for in a transition is customers shouldn't feel anything get worse like whatever they're getting today they at least got to get that and we're going to be telling them and have a compelling case and be able to deliver that we can actually improve what's going to happen to them so but yeah it's a big question of is this going to take three months six months nine months If something takes a couple of years, I would guess that's probably a little too complex.

24:57Ryan Milligan: But yeah, I think timeframes really matter in this because that's going to help you navigate toward what we can talk about next, which is you're working toward what's called the TSA, which becomes a very important document in a carve out as well. So why don't you talk a little bit about, I think you always kind of have that in mind when you're going through these operational meetings, but what's a TSA? What does that stand for? And what are you really solving for with that document?

25:21Kevin Gorman: Yeah, so it's called a transition services agreement. It's basically the document that governs the timeline from day one, which you close the deal, to when you are ready to run this business entirely by yourself. And it outlines every function that you've come up with in diligence that is a shared services or a dependency of the business you're buying on the parent. it has what is required for of the parent to do so for example if you take financials there's no finance team that you're buying they will basically do everything as they've been doing so they'll close the books they'll do invoicing they'll do collections they'll do ap and payroll and all the stuff and all that is scoped into the tsa and multiply that by however many different functions or services need to be formed on behalf of your team, your customers to keep the business operational.

26:15Kevin Gorman: And attached to every one of those buckets is, like you said, a timeline for when they expect you to be ready to take on that service. So throughout the duration of the TSA, the parent is performing the services, and at the same time your team or whatever people you have assembled are getting ready to take that on, getting all the documentation, learning all the processes and building that into, in our case, the business we already had.

26:40Ryan Milligan: And when I think through a TSA, we'll talk about timing in a little bit, but I always tell people that TSA is going to take longer than you think. Because once the deal is done, and we're experiencing this now, once the deal is done, you're just trying to get separated. And everybody's doing, you have a roadmap and everybody's doing the best they can, and it changes and the order might change or the speed might change, but everybody's just doing what they do. But for the TSA, you basically have to see the future and hypothesize hypotheticals of what could happen or what do we expect and what are you going to sign up for and what happens if you fall out of line?

27:19Ryan Milligan: Because by nature of transition, once the deal is done, the customers are always on your side. So as the buyer, you're responsible for the customer. You bought that revenue, you have to deliver on that contract. And you may have given some control over delivery of that to the seller for some period of time. It's kind of an uncomfortable position to be in, which is why this TSA exists to say it's contractual that you're going to help us deliver that service. And if you don't, or what does don't, you know, what does don't look like? Yep. What does it don't look like? You're not doing your job. And then what are the ramifications of that?

28:01Ryan Milligan: So you basically, like the hope of a TSA is you actually never look at it again, except when you're saying, okay, this one's done. We're on our own. Yep. But you basically have to stress out and freak out about everything that can go wrong, what would be acceptable and not acceptable, document that, and then come to an agreement between buyer and seller on what those things are. To me, I mean, does that make sense?

28:24Kevin Gorman: The scope is the easy part of the TSA because you're kind of building the scope as you go throughout diligence. Everybody knows, because you've talked about everything that's going to go in there, what the shared services are, what the company needs from the parent. But yeah, then it gets down to hypotheticals and how much the parent is willing to take on in terms of risk and then how they think you may interpret whatever language you've put in for a hypothetical. and so it comes down to how many hypotheticals do you want to build in and then also the economics of that and how the risk shifts because you've given the purchase price on day one so you're not recouping that and it's full in any case.

29:04Kevin Gorman: Right.

29:04Ryan Milligan: We talked about timeframes. Carveouts take a while. And I would say in general, I mean, we've done things where we're like, I think this will take 90 days. And then you sign up for 75 and it takes 105 or 120 days. So it always takes longer. My sense is the TSA is the culprit a lot of times for a lot of the how much longer it takes than you think it's going to take. And a lot of times it's these like exception cases that you end up arguing about for weeks. I mean, I think there's a lot of times there's a matter of like two, three weeks where you're arguing about like this minute chance that something goes wrong and you've done your assessment of what are the chances is going to happen is very slim.

29:40Ryan Milligan: But if it did happen, it would be really bad. And therefore, there's a big consequence. And therefore, there's got to be, you know, some sort of like, what happens in that instance, you know, and things like that. So it's just the nature of the beast. I always said, like, you think we're going to fly through the TSA because everybody goes in it with well intentions. They're like, we're gonna work together, we're gonna get separated. But you literally have to like, take this worst case scenario view of something, get it on paper. And then that just ends up being very scary in the moment. but practically speaking, like the actual probability of that coming up is like very small.

30:14Kevin Gorman: A hundred percent. I mean, in a normal deal, you have an LOI to rely on where you've outlined many of the economic and like parameters that are going to be in the agreement, whether it be reps and warranties, indemnities, things like that. But you can't really do that with a TSA because there's so much diligence and work that needs to go into defining what the scope is. So all that negotiation that you do at the LOI phase doesn't really exist for the TSA. So you end up doing it at the end, whether it be the economics. Because during the, it's funny, like during the diligence process, we on the buyer's side are incentivized to say, oh, this is so hard.

30:49Kevin Gorman: It's going to cost me so much money to go do this on my own. And the seller is the opposite. And then when it comes time to negotiate the TSA, where we want a lower cost, they want a higher cost. We think, oh, this is so easy. It's good. It doesn't take you very much. So you're battling that intuition. And then, like you said, you got all of the the hypotheticals and different things that can go wrong that no one's thought about until, you know, you put a bunch of lawyers on the phone and then they can come up with any different scenario.

31:19Ryan Milligan: And I think any carve out, there's going to be a moment where you get out of a meeting and you're just like, there's so much left and this is never going to get done or this seems insurmountable. But I do think that's where throughout the process, you want to have a mix of subject matter experts and business like investment business people in the room. Because at some point, you're going to have your technical people saying, this is everything that's required. And this is what I'm, this is, this is easy. This is harder. This is what I'm worried about. And then you're going to have your business people are going to have to kind of look at it and take a step back and say, okay, that all seems really hard, but let's take a step back and remember why we're here in the first place.

32:04Ryan Milligan: Like this business has customers that want this product or service or data. They're not looking to be disrupted. We're buying it because it's important to them. They're not looking to be disrupted. And certainly the seller has no want to mess this up in a transition. Therefore, somebody is going to have to do an assessment. Is it too hard or can can we figure this out? And my experience, I've done six of these, has been if you really take a step back and focus on these things and just think about it in totality that way, you'll find a path. That's why these things take longer though. You almost got to like sleep on it or give it the weekend or take a break and come back and just really reframe like this is like, and then it becomes a thing where you got to build trust and honesty.

32:51Ryan Milligan: It's like, I'm really worried about this. It's like, okay, let's solve for that. And you can kind of like box things in and come up with a solution for the small thing instead of like this, the lazy approach is just like go after crazy indemnities or escrows or this type of stuff. That's not really going to end up being productive because it's going to just put the seller on edge. If you do the work and you do this like zoom out, zoom in iteration, that's why it takes time. You'll usually find a path and these things, there usually is one. Yeah.

33:21Kevin Gorman: But yeah, any reaction there? No, you need to separate the 50 pages of TSA documents in the 200 rows of vendors and all the complexity with writing the deal from the actual merits of the deal and why you're doing this in the first place. Because one of those things is going to get done and you don't really have to think about it again. And the other is really what is driving this whole concept and idea. Right. We're talking about details.

33:44Ryan Milligan: So let's keep talking about details. So AI. So this was, we just had a recent experience, the first time where like we've got full on AI helping us through this process. I think there's good things that came from AI. And then there's just other complexities that come from AI. But yeah, what's your reaction to what those things are?

34:03Kevin Gorman: Yeah. And there's a couple of really good things for us. Like the, I mean, the meeting transcriptions were huge in this case, because like I said, we had that first meeting with 25 people, but then you add on lawyers, you add on third-party vendors, you add on more operating people as you get deeper and deeper into the deal. And that just gives them context and more information to work off of and it also feeds even if you were in the meeting these ai engines with everything that was said and everything that was discussed so you're not missing things or you're not forgetting things from the meeting so that that's number one then just the scale of data you can review like we leveraged it to review every single customer contract categorize them between what is owned by the entity we were buying what's owned by the parent company and all the details of it, like how much is, what's the annual value of the contract?

34:52Kevin Gorman: What is the assignment for exchange control provisions? What applies in our, in the case of our transaction? So those were the two big use cases. Then our team on the, you know, the portfolio company was using it to build their entire master plan around every, particularly the technology work and then every function of shared services and building the roadmap and all the different functions and features that needed to be moved over. Any downsides? Yeah, what I just said was a lot, and that's a lot of data to feed an engine, and therefore it spits out a lot. So we had a lot of memos and schedules that were 10 pages that maybe could have been a list of 20 bullet points or 20 rows in Excel.

35:38Kevin Gorman: So you get a lot of sprawl of context and information that AI is jamming into these documents or into these reports that become just way more sprawling. And then lawyers get involved and that becomes even more, the bounds are limitless in terms of content that can be created.

35:58Ryan Milligan: Not all of it's good. Yeah, I think, no, I think you're being generous at 10 pages. So here's my reaction. So I did a carve out in 2010 and I think our TSA and this was a carve out. It was a services business carved out from another services business. I think our TSA might have been four pages. It was like a paragraph and it was bullets probably in a 12 font. Bullet, bullet, bullet, bullet. Just we're going to do this. We're going to do this. We're going to do this. And then you just kind of figure it out. Okay. All right. Fast forward to 2026, doing a carve out. It started, I think, with like a 40 page output document that our very smart technical people put forth.

36:35Ryan Milligan: you then turn that into maybe an eight or nine tab 40 rows each excel sheet and then the back and forth became new column new column new column by the eighth iteration we had a eight tab 40 row nine different back and forth draft document of back you know and we made the decision i mean lawyers no knock on lawyers but it gets expensive like you hand a document like that with that much text in it to a lawyer, it's like your bill is going to go through the roof. So to me, more documentation is good. I do think it actually creates more work for the humans to sort through because you're just getting more on the table that you're getting to.

37:19Ryan Milligan: So you're the beneficiary of that later on, but the volume is kind of insane. Business people then need to kind of, You know, take that to a certain point, dumb it down, and give that version of something to a lawyer who can then turn it into a legal document. Because all this work that we talked about up to where I said handed to a lawyer is all operational. None of that is ready to be turned into a legal document. And that's a whole other can of worms that we're not even going to talk about today is how you then take these operational concepts and then say, how do you make that legally binding?

37:59Ryan Milligan: And then, you know, what is going right and what is going wrong and what happens if that happens? Yeah.

38:07Kevin Gorman: We also had so many overriding rules where like this rule applied to this specific service, but not the other. So there was a lot of like hierarchy of rules like this overrides this in this case. And it just got too complex. So AI, big help.

38:25Ryan Milligan: Also a complicator. And humans need to dig into everything more also goes up in my view in the case of a carve out based on our recent experience. Okay. So enough about AI because we are, I just talked about people. So let's talk about people. So there's people throughout and sometimes like we've done these where we have a new team that we're kind of bringing around a business. We've done these where there's another business that has a team bringing in a business. And there's this weird thing that kind of happens halfway through a deal or maybe three quarters of the way deal where you've got a selling party and people who are working on behalf of the seller.

39:06Ryan Milligan: and then it's also complicated and messy and they start looking at this kind of scalpel exercise and saying, well, that should go that way and this should go this way and look out for this and you're fine on that. But just in general, like talk about the people side of the business and how that all progresses.

39:22Kevin Gorman: Yeah. I mean, the management team that you are acquiring has worked for their parent for however long, but that's coming to an end, but presumably they're incentivized in some way to help the parent and they have a duty to help their parent get the best outcome. But at the same time, on day one of closing, they're going to be working for us. So they're towing the line of kind of working for both sides. But at the same time, they can become reliable narrator for a lot of things. Like we, there's a lot of things that we didn't understand about the parent company that they were building into these contracts.

39:56Kevin Gorman: And he was kind of our go between to understand the parent company and why they're writing it this way. And we got comfortable through trusting the people that were on the ground and understood both sides of the business. Yep.

40:10Ryan Milligan: And to me, whether they know it or not, the management team on the seller side that's at the business that's going to transition, they're really acting as an agent for the middle. At some point, they kind of become an agent for the deal. and they're both because they also know the business they're in better than the seller and they know the business they're in obviously better than the buyer so there'll be instances where they're advocating on behalf of the seller saying like hey buyer like this doesn't matter you don't need this don't worry about it we're fine that's helpful there'll be other instances where they're going to the seller and being like why do you care about this you don't care about this it seems like this is needed in this business.

40:56Ryan Milligan: Let's figure something out. And they do kind of get put in the middle that way.

41:00Kevin Gorman: Yeah, it can be a very difficult position to be put in. Like I had a, the car ride I worked on earlier in my career, there was a holding company that owned four distinct operating companies and they're going to sell them all. So we were, when I got brought into the business, we were going to, we were offering in a broad auction, people could bid on one of the business. They could bid on two, they could bid on three of them. They could bid on all four. And throughout that whole process of figuring out, okay, what is the best home for each of these companies and what is optimizing a return for the holding company, you're managing five CEOs.

41:34Kevin Gorman: You got the parent company CEO and four CEOs who want the best for their own business. And it's a very, yeah, it can be very complicated and difficult to deal with.

41:44Ryan Milligan: So how do you deal with that? Like how honest do you end up being with people? It's always tricky situations, but how honest do you end up being with people throughout this process as you're

41:53Kevin Gorman: working through it? I think you have to share the information. I mean, we always operate with transparency. You share what we know and what's on the table and how we're thinking about different things. What are the sticking points for us that need to be figured out? And sometimes these people can be the, they have the answers to figure out what they know what both sides want and they can find the right resolution based on their knowledge of both sides. So I think the more honest you are with your priorities, what you're looking for, what the sticking points are, the faster and easier some of this stuff gets done with these people who are kind of stuck in between.

42:27Ryan Milligan: I think also it's good to acknowledge just throughout and remind people how hard this all is and basically build in the fact that post-closing, let's give each other some grace, that everybody's trying to figure out how this is going to work optimally today based on the information we have. Then we're going to do the deal. we're going to start doing these things, moving them around. And some things may tweak. Some things may change. So maybe we thought we were going to have to allocate more resources here and they got to go there. Maybe we thought the org chart should look like this and it'll look a little more like that.

43:01Ryan Milligan: And there's going to be some change post-closing. There's just so many variables. It's hard to see it perfectly out of the gate. So yes, bring transparency, tell people your best shot at what you think we're going to do post-closing, but also let them know that that's our best assessment based on the facts we have. And a couple months from now, we might tweak those a little bit and just try to kind of build in that expectation that we're all on this together and that there might be some changes and we'll kind of go from there. So I think that can be helpful as well. You know, sometimes these carve outs kind of like, it's kind of like selling a house or cleaning out your house or cleaning your closets, you know, and stuff like that.

43:38Ryan Milligan: Now, as part of that, sometimes there's like some fringe assets or some things that people forgot they had that come in. So like any, like, how do you deal with that and any interesting stories of like something people found or forgot that they had that and how you dealt with that?

43:50Kevin Gorman: Yeah, there, these are the jump balls in cases like this, where it's not the main asset that either is critical to either business, maybe you want it, and then you wanting it makes the other side want it more in some cases. But we had some marketing assets that we were going back and forth on at the last minute. And a lot of times, I think the jump ball goes to the parent, like ultimately you're the one that's buying the, you know, like I said earlier, less than a hundred percent of a business. So you shouldn't take resources from them. But for the right, you know, asset and depending on how valuable it is to you, you can make a sticking point out of anything in these.

44:28Kevin Gorman: Right.

44:29Ryan Milligan: Yeah. And I think because it was, there's things that are unknown until later in the process, like you're talking about marketing assets. Eventually, you got to just apply logic and make a case for why you should get that. It literally wasn't thought about. It comes up later and you're like, okay, you just have to have your rationale in mind. We bought this business because of this. These things are required for that business to progress. This is one of those things as we've found, so we need it. and they may just say like, no, we forgot about that. Now we decided we wanted it, you know, and stuff like that.

45:05Ryan Milligan: So it's just like, it's just back and forth and it just becomes this kind of funny game. And it becomes, it's funny that like something that nobody even had thought about beforehand becomes like the last thing that gets negotiated and all that. So that does exist. It will also happen with a statue in the lobby or some painting in some, in some, uh, in some other place. I've heard stories of like somebody just giving away this chandelier and then the chandelier was worth like$50 ,000, you know, and stuff like that. Or back in the days when, you know, offices were more ordate and things like that.

45:33Ryan Milligan: So these things are going to come up. Honestly, in hindsight, they're more like funny and they just become emotional sticking points as much as anything in a deal for the most part. But they do exist and just expect those to come and expect them to be things that you got to kind of like either work out over time or player, if you want to play Liars Poker, then play Liars Poker with them.

45:50Kevin Gorman: Desks, chairs, docking stations. But at that point, you've been through so much and gotten through so much that you can get to the other side of those. Right.

45:57Ryan Milligan: And just know in your head that it's like for some reason there's just deal fatigue. And that's why there's like, yeah, docking stations are now an emotional point for some reason. But remember why you're doing the deal. Press forward and it'll all kind of figure out. But yeah, back to that cleaning out your closet. Like, unfortunately, I haven't moved from my house for 10 years. So like my closets just keep filling up and filling up. But there's this concept of like zero-based budgeting that you kind of bring to a carve out. Because you're forced to look at every contract, every asset, every liability so specifically, and just kind of ask why.

46:31Ryan Milligan: Like, it's done this way because it's done this way or it's done this way because of this rationale. Just talk about that and how you can kind of apply a zero-based budgeting approach to these situations as well.

46:41Kevin Gorman: Yeah. I mean, in these situations, you have to list out every vendor and understand what you're getting, what you're not getting. And a lot of what you're not getting, you need to go procure a new contract for a new vendor. so you're doing diligence on what do we use this for why do we need it is it critical the operations is it nice to have is just something we have because when you're buying a small business from a bigger parent they have a bunch more technology a bunch more service providers than a small business like the ones we typically buying so in a lot of those cases you can get savings because you just as a 50 person company you don't need the same amount of technology and resources that a 2 ,000 person organization does.

47:23Kevin Gorman: So this is the spring cleaning or the cleaning out your closet is where you find those things. You can actually identify your own cost savings, like, because it's not, it's not something you have to go cancel a contract. It's just, you're not going to go get a new one. So you kind of, it's not even like you have to clean out the closet. It's like all, it's all in there and you just pick out what you want and then you leave and you don't have to clean up yourself. Yep.

47:44Ryan Milligan: That makes sense. Okay. So like last quick question, let's just do this. take a big step back, all your experience with carve outs, all kind of do the same. Is there an early tell that the carve out is going to be harder than it looks?

47:56Kevin Gorman: I think when you get that first P &L or analysis of the contribution margin we were talking about earlier, you know how weird or sticky the deal is going to be based on what's in there and how much detail is behind it and all that. But to me, that's the biggest tell. And then you start asking questions. And then, you know, if the parent company is answering most of the questions versus the people at the company, they probably know more than the company does about their own operations. So those are the two big tells early on.

48:28Ryan Milligan: The only other thing I look for is when you think about how customers were acquired, is there some hidden draft or, you know, other force from the parent that's getting some of those customers in the door somehow and that type of thing. So hopefully there's real resources that are go to market that are kind of embedded in the business that you're buying. If not, just really make sure you understand like what that customer relationship is like, how they get new ones, how they resource, you know, that type of thing. And there's not some, because that would be one of those, like, that's never going to show up on a P &L.

49:00Kevin Gorman: That's, you know, those could be kind of hit things. The tangible asset of the brand and you kind of, yeah, do customers view themselves as customers of the parent or customers of this product or this business that you're buying. Yep. Okay.

49:11Ryan Milligan: Makes sense. All right. Well, I think that's all we have for today. So really appreciate you listening in. And please don't forget to like and subscribe so you don't miss another episode. Have a good day.