Capittal's view: I want to sell just one business line or subsidiary, how does it work?

Quick answer

Capittal's view is that selling a single business line or subsidiary is perfectly feasible, but it is a different transaction from selling the whole company: you first have to genuinely separate what you are selling from what you are keeping. There are three routes —selling assets and liabilities as a going concern, demerging the line into a new company first and then selling its shares, and selling the shares of a subsidiary that already exists— and the prior demerger is usually the cleanest. Price is not decided by the legal structure. It is decided by whether you can prove what that line earns on its own.

What three routes do I have to dispose of only one part?

All three routes are always available and you choose between them on practical cost, not on theory.

• Sale of assets and liabilities (going concern). You transfer the set of elements that make up the line: plant, stock, contracts, employees and the customer book. The buyer picks what comes across and what does not, which is why this is usually its preferred route. The cost is that every contract, licence and lease has to be assigned one by one, and many of them require the counterparty's consent.
• Prior demerger and sale of shares. You hive the line down into a new company through a corporate reorganisation and then sell that company's shares. Contracts, licences and employees travel by universal succession, with no need to assign items one at a time.
• Direct sale of an existing subsidiary's shares. This is the fastest route when the subsidiary already exists, already keeps separate accounts and its activity does not overlap with the rest of the group. In practice this situation arises less often than owners assume.

The common mistake is choosing the route by the cost of the deed. The bill that matters is not the notary's: it is the months you lose if contracts cannot be assigned or if the line has no accounts of its own to show.

Why is the prior demerger usually the clean route?

Because it turns an internal management-accounting concept into a company with its own accounts, contracts and payroll. The buyer stops buying an idea and starts buying a closed perimeter. The deal is then structured as a share purchase, which is the format the market knows how to negotiate and document.

The demerger can qualify for the special tax neutrality regime set out in the Spanish Corporate Income Tax Act, known as the FEAC regime. That regime defers taxation of the capital gains that would otherwise crystallise on the hive-down, instead of charging them at the moment of the reorganisation.

The condition is demanding and it deserves to be stated plainly: the transaction must have a valid economic reason, and a purely tax advantage does not qualify. Reorganising the group so each line has its own structure, bringing in an industrial partner or preparing a family succession are economic reasons. Demerging three weeks before signing, with the buyer already identified and no other rationale, is precisely the case the tax authorities review. A demerger is planned months in advance and its rationale is documented in writing.

What do I actually have to separate before sitting down with a buyer?

Legal separation is the easy part. Operational separation is the part that gets forgotten and the part that delays deals.

• Contracts with shared customers. The same customer buys from two lines under a single contract. You have to decide whether the contract is split, whether terms are renegotiated, or whether the customer will accept dealing with two suppliers.
• Employees and automatic transfer. Transferring an autonomous economic unit triggers article 44 of the Spanish Workers' Statute: the acquirer steps into the employment rights and obligations. You have to decide who goes, who stays and what happens to people who spend half their time on each side.
• Property. If the line operates from a unit you are keeping, the lease you grant afterwards is part of the price. A below-market rent inflates the line's result and the buyer will correct it.
• Brands and domains. The trading name, the domain and the line's accounts are usually registered to the parent. They are either assigned or licensed, with a term and a price.
• Licences and permits. Operating licences, product approvals, sector certifications and registry entries. Many are not transferable and have to be applied for again, on their own timetable.
• Systems and ERP. If the line runs inside the group ERP, you have to extract its data, decide whether it gets its own instance and cost that out.
• Central services. Administration, accounting, HR, finance, procurement, quality and legal. The line consumes them without paying for them. This is the point that destroys price most often and the one that surfaces latest.

Why does the buyer not believe the margin I am showing?

Because the buyer is not buying your combined-management margin. It is buying what the line earns alone, carrying its own structural costs. That is standalone EBITDA, and it is almost always below the EBITDA in your internal reporting.

The calculation strips out everything the line receives free from the group and adds what it would cost to buy in or build: a finance manager, a payroll service, its own insurance policies, bank funding without the parent's guarantee, standalone software licences and a market rent. You also have to review pricing to shared customers, because a cross-line discount stops existing on completion day.

This number is prepared either by the seller or by the buyer. If the buyer prepares it during due diligence, it arrives attached to a price reduction and to the suspicion that more was left unsaid. Preparing it yourself, with supporting documentation, is the difference between negotiating and absorbing.

What happens to the costs left stranded in the parent?

Stranded costs are the costs that supported the line you sold and that are still there the day after completion. Central structure was sized for a volume that no longer exists: administrative staff, office space, per-user licences, service contracts with minimum spend and managers whose workload has halved.

The effect is twofold and that is why it hurts. You sell the line and, at the same time, the business you retain carries an oversized structure now spread across less turnover. If your plan is to sell the rest of the company in three years, you have just reduced its EBITDA.

Stranded costs are calculated before signing, not afterwards. Which structure is resized, over what period and at what cost belongs to the same exercise as the sale. In a fair number of deals they end up absorbing a meaningful share of the value you thought you had captured.

Will I have to keep providing services to the buyer after completion?

Almost always, and it should be agreed in writing before signing. Transitional services agreements govern the seller continuing to provide payroll, accounting, systems, customer service or logistics to the divested line for a limited period, while the buyer builds its own structure.

A well-drafted transitional agreement fixes four things: a closed catalogue of services, the price of each one, the duration with capped extensions, and the service level that can be demanded. Without price and without a deadline, the seller ends up funding the buyer's integration free of charge for two years.

The transitional agreement also works in the seller's favour. It is what allows you to avoid dismantling central structure all at once and to phase the resizing of the costs you are left with.

Why does it take longer, price worse, and when should I not do it?

A carve-out takes longer because it chains two processes: separation first, sale second. It prices worse when that separation has not been done, because the buyer discounts what it cannot verify and budgets the cost of integrating something that arrives half finished.

With preparation done in advance, the price gap against a 100% sale narrows considerably. The things that narrow it are concrete: separate accounts for at least two financial years, standalone EBITDA supported by documents, contracts already assigned or clearly assignable, employees identified person by person, and a transitional services agreement drafted before the process opens.

There are three situations in which you should not do it.

• When the line cannot be separated without breaking the one you keep. If they share the same sales team, the same plant and the same ten customers, what you are selling is not a unit: it is a fragment.
• When the line you want out is the one carrying the structure. If it pays the central costs, selling it makes the retained business worse.
• When the real objective is to sell everything. If you will end up selling the whole company within two years, the carve-out doubles the work, leaves stranded costs behind and penalises the second process.

What is the next step if I want to sell only one part?

The first step is to calculate the standalone EBITDA of the line and the list of costs that would be left stranded in the parent. With those two figures on the table you can decide whether to demerge, which legal route costs less and whether the deal improves or damages what you retain. Before that, any conversation about multiples revolves around a number the buyer will not accept.

At Capittal Transacciones we work on separating business lines and subsidiaries as part of the confidential valuation we prepare for owners considering a sale. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including the conversation about which part of the business to sell and which part to keep.

Keep reading

• Guide: every decision you face when selling your company
• Share deal or asset deal
• Sell 100 % or just a stake

Model the carve-out before you sell it: talk to Capittal