What makes carve-out diligence different from standard acquisition diligence?

Carve-out transactions involve acquiring a piece of a larger company, which means many contracts, systems, and services are shared with the parent. Diligence must identify which obligations are division-specific, which are shared, and how shared services will transition. The complexity is substantially higher than acquiring a standalone company.

How did Mage handle shared contracts?

Mage analyzed all contracts provided by the seller and extracted party information, service descriptions, and assignment provisions. Contracts were classified as division-specific (transferring fully), shared (requiring partial assignment or TSA coverage), or parent-only (not relevant to the carve-out). This classification would have taken weeks manually.

What is a Transition Services Agreement (TSA)?

A TSA governs the seller's obligation to continue providing certain services to the carved-out business during a transition period after closing. Common TSA services include IT infrastructure, payroll processing, facilities management, and vendor relationships that cannot be immediately separated. TSA terms are critical to ensuring business continuity post-close.

What happened with the critical supplier?

Mage identified that a key component supplier's contract was held by the parent and covered multiple divisions. The contract had no assignment provision and the supplier had termination rights if the parent's volume decreased. The buyer negotiated a direct supply agreement before closing, avoiding a potential supply disruption that could have cost millions in lost production.

How Mage Helped Close a Carve-Out Transaction in Record Time

Carve-out transactions present unique diligence challenges: shared contracts, commingled operations, and separation complexities that don't exist in standalone acquisitions. When a PE buyer agreed to acquire a manufacturing division from a Fortune 500 company, AI-powered analysis proved essential to closing on an aggressive timeline.

The Transaction

A Fortune 500 industrial conglomerate was divesting a non-core manufacturing division. The division produced specialized components for the automotive industry, operating 3 plants with approximately 800 employees. Annual revenue was approximately $180M.

The buyer was a PE-backed platform company pursuing a buy-and-build strategy in the automotive component sector. The acquisition would add manufacturing capacity and key customer relationships to its existing portfolio.

Carve-outs typically take 90-120 days from LOI to signing due to separation complexity. The buyer wanted to close faster—both to capture a favorable lending environment and to limit execution risk in a competitive process.

The Carve-Out Complexity

Unlike acquiring a standalone company, carve-out diligence requires understanding what is being separated:

Shared Contracts: The division's operations relied on contracts held at the parent level—enterprise software, shared logistics providers, centralized purchasing agreements.

Commingled Services: IT infrastructure, HR administration, and finance functions were provided by the parent. The division had no standalone capability in these areas.

Allocated Assets: Real property, equipment, and inventory needed to be identified as division-specific versus shared with other business units.

Employee Separation: Determining which employees would transfer, which would remain with the parent, and how benefits would transition.

The data room contained approximately 1,200 documents, but many covered the entire parent company rather than the specific division.

The Approach

The deal team deployed Mage to accelerate the separation analysis.

Phase 1: Contract Classification (Days 1-3)

Mage analyzed all 1,200 documents and classified them:

| Category | Documents | Status | |----------|-----------|--------| | Division-specific contracts | 420 | Transfer in full | | Parent contracts covering division | 340 | Analysis needed | | Parent-only contracts | 380 | Not relevant | | Administrative/duplicates | 60 | Excluded |

The 340 parent contracts covering the division required detailed analysis to understand what obligations related to the carved-out business.

Phase 2: Shared Contract Analysis (Days 3-7)

For each of the 340 shared contracts, Mage extracted:

Parties and contract scope
Services or products covered
Which business units were mentioned
Assignment and change of control provisions
Termination rights
Pricing structure (volume-based vs. unit-based)

The analysis revealed:

| Classification | Contracts | Action Required | |----------------|-----------|-----------------| | Fully assignable to buyer | 145 | Standard assignment | | Requires consent for partial assignment | 47 | Consent solicitation | | No assignment possible | 89 | TSA or replacement needed | | Not relevant to division | 59 | Exclude from scope |

Phase 3: TSA Scope Definition (Days 7-14)

The 89 contracts that could not be assigned required either TSA coverage or replacement contracts. Mage's extraction enabled rapid TSA drafting:

| Service Category | Contracts | TSA Coverage Needed | |------------------|-----------|---------------------| | IT/Software | 34 | 18 months | | Logistics/Shipping | 22 | 12 months | | Purchasing/Procurement | 18 | 6 months | | Facilities | 15 | 12 months |

The deal team used Mage's contract summaries to draft TSA schedules without re-reading each contract, saving approximately 2 weeks of TSA negotiation time.

The Critical Discovery

Day 5 of diligence, Mage flagged a supplier contract requiring attention: a master supply agreement between the parent and a key component supplier.

The contract provided:

Supply of a critical electronic component used in 60% of the division's products
Volume-based pricing tied to parent-wide purchasing
Termination right if parent's annual volume decreased by more than 25%

The division accounted for approximately 40% of the parent's volume under this contract. Post-carve-out, the parent's volume would drop 40%, triggering the supplier's termination right.

Risk: The supplier could terminate the parent's contract after closing, and the division would have no direct supply agreement. Replacement components would take 6-9 months to qualify, potentially halting production.

The Resolution

The deal team escalated the supplier issue immediately:

Week 1: Supplier Outreach

The buyer's operations team contacted the supplier directly to discuss a standalone supply agreement for the carved-out division.

Week 2: Negotiation

The supplier initially sought pricing concessions, arguing the division alone didn't qualify for volume discounts. After negotiation, the parties agreed to:

A 3-year supply agreement at current pricing for year 1
Price adjustments in years 2-3 based on actual volume
Minimum purchase commitments protecting the supplier's planning

Week 3-4: Documentation

The supply agreement was drafted, negotiated, and signed as a condition to closing. The buyer secured component supply without relying on the parent's terminated agreement.

The Results

Timeline Comparison

| Milestone | Typical Carve-Out | This Transaction | Savings | |-----------|------------------|------------------|---------| | Contract classification | 2-3 weeks | 3 days | 14 days | | Shared contract analysis | 3-4 weeks | 10 days | 14 days | | TSA drafting | 2-3 weeks | 1 week | 14 days | | LOI to Signing | 90-120 days | 60 days | 30-60 days |

Quality Metrics

| Metric | Value | |--------|-------| | Contracts analyzed | 1,200 | | Shared contracts requiring action | 340 | | Critical supplier risk identified | 1 | | TSA schedules drafted from AI extraction | 89 | | Post-closing separation issues | Minimal |

The Outcome

The transaction signed in 60 days and closed 30 days later after regulatory clearance and financing finalization. The carve-out separation proceeded as planned:

TSA services operated smoothly for the defined periods
Supplier transition was seamless with the new direct agreement
Contract assignments were obtained for all required consents
Employee transition proceeded without material issues

The buyer's investment thesis was validated: the carved-out division, with proper separation support, could operate as a standalone business and integrate into the platform company.

Lessons Learned

Carve-outs require contract-level separation analysis. Understanding which contracts are division-specific versus shared is foundational. Without this classification, TSA scope, consent requirements, and replacement needs cannot be determined.

Volume dependencies hide in shared contracts. The critical supplier issue was buried in a parent-level contract that didn't obviously relate to the carved-out division. Only comprehensive extraction and analysis revealed the dependency.

TSA negotiation starts with contract understanding. TSA schedules are only as good as the underlying contract analysis. Mage's extraction enabled drafting specific, accurate TSA terms rather than generic placeholders.

Speed matters in carve-outs. Sellers divesting non-core assets often want quick execution. Buyers who can close faster have competitive advantages in processes. AI-enabled acceleration changes the competitive dynamics.