How carve-out FDD differs from a standard deal: building standalone financials, sizing stranded costs, TSAs and the EBITDA adjustments that move the price.
A carve-out is one of the most technically demanding situations a Transaction Services team will face. When a buyer acquires a division, a business unit or a subsidiary that has never operated as a standalone company, the historical financials don't describe the business being sold — they describe a fragment of a larger group. The job of FDD is to rebuild what that fragment would look like on its own two feet.
Get this wrong and the buyer either overpays for an EBITDA that won't survive separation, or walks away from a good asset. It's also a topic that separates strong interview candidates from the rest, because it forces you to think about how a business actually runs, not just how its accounts are presented.
A division inside a group shares far more than an org chart suggests. It typically relies on the parent for IT systems, finance and HR back office, procurement scale, group insurance, treasury, legal, senior management time, shared premises and brand. None of that disappears at completion — but the way it is paid for changes completely.
The reported divisional P&L reflects two distortions that pull in opposite directions:
FDD has to strip out the first and add in the second to arrive at a defensible standalone view.
The central analytical exercise in a carve-out is converting allocated costs into standalone costs.
| Allocated cost (in the accounts) | Standalone cost (economic reality) | |
|---|---|---|
| Basis | Group's internal allocation key | What the business would actually pay alone |
| Reliability | Often arbitrary, smoothed | Must be built bottom-up |
| Direction | Can over- or under-state | The number that matters for the buyer |
A clean carve-out analysis builds the standalone cost base function by function: what does this business genuinely need to run IT, finance, HR and procurement on its own? Sometimes the standalone cost is higher than the allocation (the division loses the parent's purchasing scale). Sometimes it's lower (it was carrying a disproportionate share of a bloated head office). Either way, the conclusion has to be evidenced, not assumed.
Stranded costs are the mirror image, and they bite the seller. These are the central costs left behind in the parent after the division leaves — the head-office capacity that was sized for a larger group and can't be removed overnight.
If a division contributed 20% of group revenue and carried 20% of allocated overhead, removing it doesn't automatically remove 20% of the actual head-office cost. The receptionist, the group ERP contract and the CFO don't shrink proportionally. Quantifying stranded costs matters for the seller's own equity story and is a frequent point of negotiation in the separation.
No business separates cleanly on day one. A Transitional Service Agreement is the contract under which the seller keeps providing certain services — payroll, IT hosting, ERP access — to the carved-out business for a defined period after completion, usually 6 to 24 months, at an agreed price.
For FDD, TSAs raise three questions that directly affect value:
A good analyst models the TSA period and the post-TSA steady state separately, because the EBITDA the buyer actually inherits is the post-TSA one.
All of this comes together in a pro forma adjusted EBITDA — a bridge from reported divisional EBITDA to a sustainable standalone figure:
The gap between the reported number and this standalone number is frequently material — and it is exactly where carve-out deals are won, lost and repriced.
Carve-outs distort the balance sheet as much as the P&L:
If you can explain — clearly and in plain language — why a divisional P&L overstates or understates standalone profitability, why TSAs matter, and what stranded costs are, you demonstrate exactly the commercial understanding TS teams are looking for. It's a topic that rewards thinking about how businesses actually operate, not just how their accounts are drawn up.
A strong answer sounds like: "I'd rebuild the cost base function by function to get to a standalone view, separate the TSA period from the post-TSA steady state, and adjust EBITDA for the difference between allocated and standalone costs — flagging the one-off separation costs as a funding item."
The Transaction Services Interview Programme (€119.99, one-time) includes carve-out case studies — standalone cost builds, TSA modelling and pro forma EBITDA bridges — drawn from real deal situations. Enrol today.
Hundreds of candidates prepared their interviews with this programme. Those who landed the role have one thing in common: they worked the cases before walking into the room.
