First and foremost:
The success of Private Equity (PE) Carve-outs is largely determined by procurement. As this function often accounts for 50–60% of total costs, it offers the quickest way to boost EBITDA. A successful Transformation This requires the swift termination of Transition Service Agreements (TSAs), the establishment of absolute data transparency (Spend Cube), and a consistent realignment of the supplier base with the strategic objectives of the „NewCo“.
Key Facts on the PE Carve-out in Procurement
- Definition: The operational and legal separation of a business unit to create an independent company.
- EBITDA Leverage: Any cost saving in procurement disproportionately increases the company's value through the exit multiple (e.g., 10x).
- Day-1 Readiness: Focus on immediate legal ordering capability and supply security without the parent company's infrastructure.
- TSA-Exit: Rapid reduction of dependency on „OldCo“ to gain operational agility and reduce cost burdens.
1. Definition: What is a carve-out in the PE context?
Unlike a classic company acquisition, here a „organic subsection“ is extracted rather than a ready-made, independent entity. This means that the new entity (NewCo) often has no IT systems, HR processes, or its own purchasing organisation at the outset. The challenge lies in completely rebuilding these structures under significant time pressure, while operational business must continue seamlessly and without disruption to the supply chain.
2. The strategic relevance of procurement in spin-offs
In many corporations, purchasing acts as a centralised support function that benefits massively from global framework agreements and enormous economies of scale. If this protective shield is removed by a carve-out, the NewCo faces the threat of massive margin erosion due to poorer stand-alone conditions.
Yet this is precisely where the opportunity lies for private equity investors: procurement is the area where cash flow can be generated most quickly. While revenue increases often require a long lead time, savings in sourcing have an immediate impact on the bottom line. Professional carve-out management in procurement identifies the inefficiencies of the old, often sluggish corporate structure and uses the new agility of the NewCo to make supplier relationships more dynamic, competitive, and results-oriented.
„Procurement in a carve-out is far more than just a department; it is the financial early warning system and the primary driver for the immediate EBITDA security of the new organisation.“
3. The three critical phases of procurement transformation
Phase 1: The preparation phase (Pre-deal & Signing)
A detailed inventory must be carried out even before the legal transition. Here the „perimeter“ is defined: Which contracts belong exclusively to the NewCo? Which are mixed contracts? The goal is to identify risks (e.g. loss of group discounts) and to prepare the „stand-alone“ cost planning.
Phase 2: The Interim Phase (Day 1 Readiness)
From the first day of legal independence, procurement must be able to „breathe“. The new company must be able to order, receive goods, and pay invoices legally. Since its own systems are often still missing, transitional service agreements (TSAs) are used here. The focus is on pure supply security.
Phase 3: The Optimisation Phase (Value Creation Plan)
Once the NewCo is stable on its own feet, the real value enhancement phase begins. Strategic re-tendering will now be carried out, the supplier base will be consolidated, and processes will be digitised.
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4. Strategic success factors for a self-sufficient NewCo
Maximum donation transparency through data cleansing
Data is the most valuable asset in a carve-out. Often, historical purchasing data in the parent company's ERP systems is incomplete or incorrectly assigned. Building a dedicated Spend Cube is essential. Only those who precisely know what they are buying, from whom, and under what conditions can be successful in negotiations.
Active contract management and „right-sizing“
A carve-out offers a rare opportunity to rid the supplier base of „legacy issues“. Contracts are not simply taken over, but critically reviewed. Often, by focusing on specialised partners, better conditions can be achieved than by anonymously being part of global corporate contracts.
Establishing an entrepreneurial purchasing culture
In a PE-led NewCo, buyers must become „Value Managers“. This requires a rethink: shifting away from pure compliance checking towards proactive cost management and active risk management.
5. Deep Dive: The EBITDA Leverage – Mathematical Value Enhancement
Why do PE firms focus so heavily on purchasing? The answer lies in the leverage on the enterprise value.
The simple logic:
Every euro saved by purchasing goes directly into EBITDA without deductions.
A calculation example:
Suppose a company has an EBITDA of €10 million and a procurement volume of €50 million. If the procurement department manages to achieve a moderate saving of 4%, this corresponds to a direct contribution to profit of €2 million.
The new EBITDA therefore rises to €12 million. With a market-standard exit multiple of 10x, the company valuation increases from €100 million to €120 million through this measure.
The formula in text form:
Company Value = EBITDA x Multiple
6. Practical Example: Successful Repositioning of an Industrial Champion
An international manufacturer of electronic components was spun off from a DAX-listed group. The new company faced the problem that logistics services provided through the parent company were 20% cheaper than those obtained through stand-alone sourcing.
The Strategy
Instead of trying to match the parent company’s unattainable prices, the new company relied on the private equity investor’s sourcing network. By pooling its requirements with other portfolio companies, the new company was able to achieve economies of scale in indirect costs (logistics, IT) that exceeded those of the former parent company. Within 12 months, the cost of materials ratio fell by a total of 6.5 percentage points, which significantly bolstered the investment case.
7. ESG and Change Management: The Modern Dimension of Transformation
A modern carve-out may ESG aspects (Environmental, Social, Governance) must not be neglected. Investors today meticulously check compliance with the German Supply Chain Due Diligence Act (LkSG) and valid carbon footprints when exiting.
At the same time, the cultural aspect is crucial. A carve-out creates unrest. Successful organisations use this phase for targeted change management. Purchasing must be positioned as an „enabler“ – equipped with more modern tools and reporting directly to management.
8. Risk Management: Strategic Management of Transition Service Agreements (TSAs)
TSAs are the „umbilical cord“ to the parent company. They are necessary to maintain operations but often act as a brake on profitability and freedom.
Procurement must act as a „TSA hunter“ here: any service transferred to one's own responsibility faster than planned saves fees and eliminates bureaucratic interfaces with the old organisation. Strict monitoring of TSA lead times is a critical success factor for margin.
9. Day-1 Checklist: Operational Safeguarding of Procurement
- [ ] Master data: Have all suppliers been informed of the new company name and VAT ID?
- [ ] Payment transactions: Are bank details and credit limits stored?
- [ ] System access: Do buyers have access to all necessary ERP modules?
- [ ] Communication: Was a clear signal sent to the top suppliers?
10. Conclusion: Procurement as a Strategic Pace-Setter in Carve-outs
A Carve-outs in Private Equity The environment is an open-heart operation for the company. Procurement is far more than a supportive administrative function; it is the primary driver for the financial recovery and sustainable value enhancement of the NewCo.
Those who disciplinedly navigate the complex phases of transformation, leverage data as a strategic weapon, and consistently reduce dependence on the parent company, create the essential foundation for above-average investment success upon later exit. Ultimately, procurement forms the link between operational excellence and investors' return targets, thereby becoming the most important lever for the new company's future viability.
„Real added value in a carve-out arises where the complexity of old corporate structures is replaced by the radical efficiency of an independent, entrepreneurial purchasing organisation.“
11. FAQ – Frequently Asked Questions about Carve-outs
How to prevent supply stoppages during the separation phase?
Through early and transparent communication. Suppliers must understand that NewCo is a financially sound company with a strong investor behind it. Written confirmations of solvency (comfort letters) are a standard tool for security here.
What happens to the parent company's framework agreements?
As a rule, these end with the legal closing (Day 1). It is therefore crucial to negotiate transfer agreements („Addendums“) or new interim contracts months in advance to avoid falling into a no-contract vacuum with spot prices.
Why is NewCo's agility an advantage over economies of scale?
Large corporations are often paralysed by bureaucratic processes. An independent NewCo can react much faster to market changes, utilise more flexible niche suppliers, and enter into innovative partnerships that would often have failed in rigid corporate structures due to resistance from central departments.
How does ESG influence resale value (exit)?
Buyers are paying significant premiums in the current market environment for businesses with a „clean“ and transparently documented supply chain. Procurement that proactively manages and digitises ESG risks in a carve-out minimises buyer due diligence risks, thereby massively increasing the selling price.