Hi Andy - our family office specializes in carve-outs and I would be happy to discuss. My email address is [redacted]

Andy, I have seen deals like this work very well. You just need a great go forward and access to WC.

We specialize in serving on both the buy and sell side of carve outs. Done 60+ carve outs over the years. Happy to speak directly. [redacted]

Hey Andy, for software companies you need to make sure you have a viable shared services agreement for post close. This will help both ensure a smooth transition as well as set the table for the actual stand-alone operating costs for various functions, especially support. Happy to discuss live if you want.

A few concerns leap to mind. Private message me for more. About a carve-out, that makes IP, shared services (like Nate mentioned), and lots of other line-drawing crucial. Have they been bundling with other products? If so, sales numbers may be squishy, and QOE analysis could be helpful -- but also will be harder to do. Temptation in SaaS acquisitions is to get too stuck on financial metrics in due diligence but not dive as deep into the product and what's on the horizon -- technically for the product itself as well as in the competitive environment. Historical revenue/EBITDA, customer stickiness, overhead, reputation, etc. may all be great. But from the limited description, my chief worry would be that you end up with a legacy product and a team where there's been high turnover and no seller commitment to continue to provide technical/engineering support, but they have also not invested in keeping the product compatible current with all platforms it's meant to run on or integrate with. Imagine an iPhone app with thousands of subscribers but a developer who stopped investing and it's therefore not able to work on the latest or next version of iOS, or all the people who originally built it or who did any upgrades/patches more than two years ago are long done. And, of course, depending how their product is distributed, you may have to solve for a lot of tricky assignments, waivers, or consents with re-sellers, or other platforms on which it is sold. Again, analogizing to Apple, if they sell through the AppStore, but the licenses/integration are in the parent cos name, you might not have the leverage to renegotiate equal terms with all the counterparties -- make those conditions to close. Depending on the industry, you may also have ballooning overhead from customers who will only keep the product if it integrates with legacy platforms/software (e.g. because they don't want to upgrade their network or systems). Buying an older SaaS product raises a lot of product issues -- including often inability to add new features that are necessary to compete. I'd have to know a lot more, but shooting in the dark based on "free" and ten-year-old, make sure you do a deep engineering/developer dive into the technical side of the product. The technical side can be hard to get access for -- since seller may view a look under the hood as akin to giving up the recipe for the secret sauce, or for other reasons. You should also get serious indemnification for IP ownership/non-infringement -- if you buy but it turns out any essential part of the source code is stolen, you're in trouble. There are ways to DD that, but you should be sensitive to SaaS relevant issues in your SPA.

I'm looking at one of these too - agree with the previous comments re: services. In my case, the other key issue are brand and IP rights. If you can work out a deal to continue to use the parent company's brand name and they also benefit from what you build that they otherwise would not be able to - in my case there's also benefit that I would get a perpetual license to the internal IP (mostly media and digital content).

You may need to get creative about how you structure the deal - I'm considering an asset transfer (preferably) to keep myself at arm's distance from underlying liabilities associated with the parent company. They are more interested in a JDA so as to retain some level of control, though this can get messy and is letigiously intensive.

All the comments above are great. When it comes to a 'spin out', regardless of how it is set up inside the mother-ship, you want assets and people, not a company. In other words, assets are sold to you (NewCo) and people who are coming resign from one and sign up for the other.

I wouldn't, for example, take a sub's corporate books rather they keep it, you buy the assets and put into a clean company with no liabilities coming forward. Sometimes, BigCo buys littleCo and X period of time goes into 'what's core' analysis and decides littleCo has to go. Great, buy the assets so you won't be surprised later down the road with any issues lingering from LittleCo. The 'spin-out' is your NewCo.

I've seen founder 'buy' their company back only to get crushed with warranty claims because the original buyer, well, screwed up. The founder should have left the shell behind, bought the ip, customer list, trademarks, etc. and combined that with a hefty indemnity from BigCo would have been way better.

Rick

Have done carve outs at an institutional level, they can be very complicated. Feel free to reach out. A lot of the problems can be sorted through based on structuring (or at least buy you time to deal with them). If they are willing to do a long shared-services agreement and a long-deferred payment, then you can essentially get a free option to carve out the company. For instance, one I was involved in was a 2 year shared-services agreement and a 2-year deferred payment; if we weren't able to get the systems and structure set up within the 2 year time period, we just turned the keys back over and all we were out was WC needs we funded.

Interesting! thanks

Agree with Zach, all in how you structure the deal. What's important is to build in the proper provisions with respect to timing and payment. Depending on size I've seen instances where ex parent in essence funds the transaction partially almost through a sort of monetization of receivables type of situation.

Hi Andy, carve out is a very tricky business. First because you cannot really be sure that when the company will be cut from existing "mother" it'll survive. Many support and interactions can be hidden or underestimated. Secondly you have the cost perimeter issue, it is tricky to build a P&L as if the perimeter was a stand alone company. In these situation the seller tends to underestimate the costs attributed to the carve out or forgets about fonctions support the division is getting for free by the group. In any case the carve out EBIT is usually overestimated. I've seen a deal (from a large mobile company on BtoB support functions) where carveout EBIT was suppose to be 20% pre deal and in the end the stand alone company never could make any profit. Best protection is careful due diligence with, among other aspects, these risks in mind.

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Hi Andy, I agree with Jean-Cyrille. The carve-out business depends heavily on support (HR, IT, business systems, processes) and interconnections with the larger organization. The strength and cost of these ties are usually underestimated in stand-alone P&Ls provided. The deal will likely need extended support (after buy-out) from mother business in the form of support services and among other things carefully understanding dependencies with larger business.

Employee benefits can be an issue as well. Often the mothership provides employee benefits that can't be replicated at similar economics by a smaller entity with fewer employees.

We have a specialty in supporting carve-outs (both on the buy-side and sell-side). www.virtaspartners.com. These are complicated transactions and happy to jump on the line to discuss lessons learned. [redacted]

Assuming an asset sale, people can be a risk. Keeping key talent can be an issue as people do not move with the asset. These folks agreements are with the old company, not the asset. They are entitled to any severance or other benefits owed from the old co. They are not obligated to join the new co.

Also in evaluating the carve out financials, you can pretty much assume that they have understated shared services in the SGA line.