Selling part of a larger business is rarely as simple as finding a buyer for a profitable division. On paper, the transaction may look relatively contained: identify the asset, agree a valuation and transfer ownership. The reality is usually far less tidy.
A division that has spent years operating inside a larger group will often rely on central systems, shared employees, group contracts and funding arrangements that were never designed with a future sale in mind. Its financial performance may be visible internally, but that does not necessarily mean it can be presented as a credible standalone business.
This is where the finance function becomes central to the outcome. Gary McGaghey believes that a successful divisional sale depends on resolving the difficult operational and financial questions well before buyers begin their diligence. By the time a formal process starts, the seller should already know what is being sold, how the business makes money and what it will take for that business to operate independently.
Define the business before attempting to value it
The first challenge is establishing the transaction perimeter. That sounds straightforward, yet a legal structure and an operating structure are not always the same thing.
A division may sit within one legal entity while drawing employees, technology and supplier support from several others. Customer contracts may cover multiple services or regions. Intellectual property may be owned centrally. Insurance, payroll, procurement and treasury arrangements may all be managed at group level.
The finance team therefore needs to establish exactly what the buyer will receive. Every material component of the business should fall into one of four broad categories: it will transfer with the division, remain with the seller, be replicated before completion or continue temporarily through a transitional arrangement.
Leaving those decisions unresolved creates uncertainty, and uncertainty tends to become expensive during a transaction. A buyer that cannot clearly see how the business will function after separation is likely to build additional cost and risk into its valuation. It may also seek stronger protections in the purchase agreement or require the seller to provide support for longer than originally intended.
McGaghey’s view is that the perimeter discussion should happen before the valuation debate becomes too advanced. There is little value in arguing over an EBITDA multiple if the parties do not yet agree on the people, costs, contracts and assets included within that EBITDA.
The retained group also needs careful consideration. A division may carry an allocation of central costs while benefiting from resources that will remain after the sale. Once the revenue leaves, some of those costs may stay behind.
These stranded costs can be easy to underestimate. A software licence may not reduce because one division has been sold. A senior employee may have spent 30 per cent of their time supporting the division, but their salary will not automatically fall by 30 per cent at completion. Property, insurance and procurement commitments may also continue.
A credible exit plan should therefore address two businesses at once: the division being sold and the group that remains.
Build financial information that can withstand challenge
Carve-out financial information is often one of the most heavily tested areas of a divisional sale. Buyers will not accept an attractive headline profit figure without understanding how it was constructed.
The general ledger may not mirror the transaction perimeter. Revenue might be identifiable at contract level, while costs are recorded centrally or allocated using broad assumptions. Finance teams can find themselves reconstructing several years of performance from management accounts, operational data and group reporting systems that were built for a different purpose.
The work involves judgement, but that judgement must be explainable. Allocations should reflect the economic reality of the business rather than simply producing the most appealing result.
For example, allocating central costs on the basis of revenue may be reasonable for one function and misleading for another. IT support might be better linked to user numbers, while insurance costs could relate to asset values or risk exposure. Some group costs may disappear under new ownership, whereas others will have to be replaced by the buyer.
A buyer will normally create its own view of the standalone cost base. If the seller has not already done the work, the buyer’s assumptions can quickly become the default position in negotiations.
Gary McGaghey argues that the strongest financial presentation is not necessarily the one with the highest adjusted EBITDA. It is the one that can be traced back to reported performance and defended consistently across the data room, management presentation and transaction documents.
That means preparing a clear bridge from the group’s accounts to the division’s results. Adjustments should be supported by evidence, with a distinction between genuine one-off items and ordinary costs that management would simply prefer to exclude.
The analysis should go much further than the income statement. Buyers will want to understand cash conversion, capital expenditure, working capital patterns and the quality of revenue.
Contract-level profitability can be especially revealing. Two customers may generate similar revenue but make very different contributions after labour, mobilisation and service costs are considered. Renewal dates, pricing mechanisms, customer concentration and termination rights can all influence how a buyer views future earnings.
Working capital deserves similar attention. A division may appear highly cash generative across a full financial year while experiencing significant pressure at certain points in the month or quarter. Payroll timing, customer billing cycles and supplier terms can create funding requirements that are hidden by year-end reporting.
These details matter when the parties negotiate a working capital target or choose between a locked-box structure and completion accounts. A poorly supported assumption can transfer value from one side of the deal to the other without changing the headline purchase price.
Forecasts also need to be grounded in operational evidence. A top-down growth rate is unlikely to survive serious diligence. The buyer will want to see how volumes, pricing, retention, wage inflation, new business and investment combine to produce the forecast result. Two key aspects buyers look for evidence of are (1) demonstrated ability to protect or enhance gross margin through recovery of cost inflation through pricing pass through to customer (2) a turnover growth assumption based on, firstly, a robust new business pipeline and win conversion rates supported by evidenced prior win rates, and secondly, contract retention projections based on evidenced historical renewal rates.
Each major assumption should have an owner within the business. Finance can coordinate the model, but it should not invent the commercial plan on behalf of sales, operations or procurement.
Separation planning is part of the valuation story
It is tempting to treat separation as an implementation issue to be addressed after a preferred buyer has been selected. That is usually too late.
A buyer will assess not only the quality of the division but also the complexity of extracting it from the group. If separation appears poorly planned, the buyer may assume higher costs, a longer transition and greater disruption.
Technology is often the most complicated workstream. A division may depend on group platforms for financial reporting, payroll, customer management, procurement, cyber security and data storage. Some systems can be copied or replaced before completion. Others may need to remain available under a transitional service agreement.
The seller should understand the cost and timing of each option. A transitional arrangement can provide continuity, but it should not become an open-ended commitment. Every service needs a defined scope, owner, price, service level and exit date.
The exit plan is particularly important. Without one, the seller may continue supporting the business long after the original transaction team has moved on, often through systems and processes that become more difficult to maintain over time.
Day One requirements are generally more basic, but no less important. The business must be able to pay employees, invoice customers, collect cash, approve expenditure and meet its statutory obligations. New bank accounts, insurance policies, delegated authorities and reporting processes may all be required.
The cost of this work should be captured early. Separation costs can include systems implementation, external advisers, retention payments, duplicated roles, contract novations and temporary resources. If these are discovered late, they can affect both deal economics and the seller’s internal approval process.
Management capacity is another practical constraint. The people with the greatest knowledge of the division are usually also responsible for running it. Asking them to maintain performance while answering diligence questions and designing a standalone organisation can quickly become unrealistic.
A well-run process distinguishes between information that only management can provide and work that can be handled by a dedicated separation team. It also establishes a single source of truth. Few things undermine buyer confidence faster than receiving different headcount figures, cost estimates or contract lists from different parts of the organisation.
Good preparation removes reasons for a buyer to hesitate
The value of exit preparation is not limited to producing a better data room. It gives the seller a clearer understanding of the asset and exposes issues while there is still time to address them.
Some findings may be uncomfortable. A contract may not be transferable without consent. A supposedly independent management team may rely heavily on group support. A strong EBITDA margin may weaken once realistic standalone costs are included.
Discovering those issues before launch is still preferable to allowing a buyer to find them midway through diligence. Sellers retain more control when they can explain a problem and present a solution, rather than reacting to a buyer’s interpretation of it.
For Gary McGaghey, the finance leader’s role in a divisional sale is ultimately to make the business legible. The buyer needs to understand what it is acquiring, what the numbers represent and how the organisation will function after completion.
That work is detailed and occasionally unglamorous. It involves reconciliations, contract schedules, cost allocations, systems maps and repeated testing of assumptions. Yet it is often this groundwork, rather than the final negotiation, that determines whether a divisional exit creates the value its owners expected.
