Carve-out

A carve-out (divestiture or sale of a business unit) is an M&A transaction in which a company separates and sells a specific business unit, division, or subsidiary to a new owner as a standalone entity. Unlike a full sale, in a carve-out the seller keeps the rest of the business and transfers only the carved-out unit — with its finances, contracts, employees, and assets. In Mexican SME and mid-market deals it happens when a buyer wants only one unit or the seller divests a non‑strategic unit.

Why do carve-outs happen?

Four typical scenarios:

• Divesting a non‑strategic unit

  A company that has grown organically into adjacent businesses decides to divest a unit that no longer fits the core strategy. The unit may be profitable but consumes disproportionate management attention. Selling it frees capital and focus for the main operation.

• Liquidity pressure

  A holding or diversified SME needs capital — for debt repayment, investment in the core business, or partner exit — and the fastest path is selling one unit rather than the whole company.

• Buyer interested only in one part

  A strategic buyer wants a specific product line, customer base, or geography but not the whole company. The seller keeps the rest. Common in distribution and services in Mexico, where a founder has built several verticals under one entity.

• Separation for family succession

  In Mexican family businesses, carve-outs sometimes work as a succession mechanism — separating units so different branches of the family can inherit or sell them, or selling one unit to fund the purchase of a family member’s stake who wants liquidity.

How is a carve-out structured?

The structural complexity of a carve-out is notably higher than a full sale because the seller must first separate what is sold from what is kept. That requires:

1. Legal separation

   If the unit to be sold is not already in a separate legal entity, the seller must create one — typically a new Sociedad Anónima de Capital Variable (SAdeCV) — and transfer to it the relevant assets, contracts, employees, and liabilities before closing. This can take 60–120 days and has tax implications that must be structured carefully under Mexican law.

2. Financial separation

   The carved-out unit needs standalone financials — P&L, balance sheet, cash flow — that show its performance independently of the parent. Where costs, infrastructure, and management are shared across units, building standalone financials requires allocating shared costs, which is both a technical and a negotiating exercise: how costs are allocated affects the carved-out unit’s normalized EBITDA.

3. Operational separation

   Shared services — accounting, HR, IT, logistics, procurement — must be replicated in the carved-out entity or covered by a Transition Services Agreement (TSA), under which the seller continues to provide those services to the buyer for a defined period after closing.

A carve-out adds stages and time to the standard process; for the overall flow of an M&A deal, see stages of the M&A process.

Illustrative example (food manufacturing and distribution, Mexico 2024, anonymized): a food company operated two units under one legal entity. A strategic buyer approached interested only in the distribution network. The seller agreed to carve out that unit.

The seller kept the manufacturing operation and used the proceeds to fund a production line expansion. A well‑structured carve-out creates value for both sides: the seller monetizes a unit without losing the core business; the buyer acquires exactly what it needs without paying for what it does not. (TSA: accounting and payroll.)

How does a carve-out differ from a full sale or a spin-off?

In Mexican SME M&A, carve-outs are less frequent than full sales but occur regularly in family conglomerates, holding structures, and businesses that have grown organically into adjacent verticals. For the general context of buy‑sell transactions, see M&A.

What complicates a carve-out in Mexico?

• Shared costs that are hard to split

  When the seller’s accountant has booked all expenses in one entity for 10 years, building standalone financials for one unit means reconstructing cost allocation from scratch. Buyer and seller will disagree on how to allocate shared costs — and every peso of shared cost allocated to the carved-out unit lowers its EBITDA and thus its value.

• Non‑transferable contracts

  Many customer and supplier contracts in Mexican SMEs are with the legal entity, not the business unit. Transferring them to a new entity requires the counterparty’s consent — which does not always come, especially if customers learn the business is changing hands.

• Tax implications of the separation

  Transferring assets and contracts from one Mexican legal entity to a new one triggers taxable events — VAT on asset transfer, income tax on gains, possible stamp duty. This must be structured before the transaction, not discovered during due diligence.

• Post‑closing operational dependencies

  If the carved-out unit shares warehouse, fleet, or technology with the retained business, the TSA must define precisely what is provided, at what cost, for how long, and what happens when it ends. A poorly drafted TSA becomes a permanent operational dependency neither side wanted.

Splitting working capital between the sold unit and the retained one is also a negotiating point in a carve-out.

What do buyers and sellers ask about carve-outs in Mexico?

Does a carve-out always require creating a new legal entity in Mexico?

Not always. If the unit to be sold already operates in a separate SAdeCV or SAPI — as in some holding structures — the transaction is simpler: the buyer acquires the shares of the existing entity. If the unit is part of a single legal entity with other operations, creating a new entity is required before the sale can close. The separation process adds time and cost but is necessary to deliver a clean, standalone business to the buyer.

How is the unit valued in a carve-out?

The same as in any M&A deal — typically a multiple of normalized EBITDA in Mexican SME deals. The complexity is defining the normalized EBITDA of the carved-out unit specifically: allocation of shared costs, internal transfer pricing between units, and synergies that exist only because the units operate together. The buyer will build its own standalone EBITDA model; the seller should prepare one proactively to anchor the negotiation.

What is a TSA and why does it matter in a carve-out?

A TSA (Transition Services Agreement) is a contract under which the seller continues to provide specific services — accounting, payroll, IT, logistics — to the carved-out unit for a defined period after closing while the buyer builds its own capabilities. In carve-outs of Mexican SMEs where the buyer acquires a unit that has never operated independently, a TSA of 6 to 18 months is standard. The TSA should define: services provided, cost methodology, termination conditions, and what happens if the buyer needs the services beyond the agreed period.

In which sectors are carve-outs most common in Mexico?

Sectors where businesses have grown organically into adjacent verticals: food and beverage (manufacturing + distribution), industrial services (multiple geographies or service lines), family conglomerates with diverse holdings, and retail or distribution that has moved into logistics or private label. In pure service businesses with no physical assets and fully shared teams, carve-outs are harder to execute cleanly and less frequent.