Carve-out valuation and separation accounting: what CFOs consistently get wrong

The concept at the center of this article is thestandalone basis of accounting for a carved-out business, and the reason it causes so much trouble is straightforward: the unit being sold has never existed as an independent company. It has shared IT infrastructure, treasury, HR, legal, tax, and procurement with a parent that will no longer be there after Day 1. Turning that operational reality into auditable, GAAPGAAPThe standard set of accounting rules companies follow to prepare consistent, comparable financial statements, dominant in US reporting.View full definition →-compliant or IFRSIFRSThe global accounting rulebook that governs how companies report financial results, used across the EU and 140+ jurisdictions.View full definition →-compliant financial statements, ones that a buyer can actually price, is where most carve-out processes unravel.

What carve-out financials must a CFO produce?

A CFO leading a divestiture is responsible for producing carve-out financial statements, often called "carved-out" or "combined" financials, that will face scrutiny from the buyer's advisors, auditors, and, if the deal is material, from securities regulators. In the United States, the SEC requires that a registrant selling a significant business include up to three years of audited carve-out financials in the filing. That is a hard legal constraint, not a best practice.

Beyond compliance, the financial statements directly set the negotiating floor. If your cost allocations are aggressive or your standalone revenue recognition is unclear, the buyer's model will price in uncertainty with a discount. Deals like GE's carve-out of GE Capital components and Johnson & Johnson's separation of Kenvue in 2023 illustrated this publicly: the quality of separation accounting drove analyst commentary on whether the remaining parent was properly cleaned up and whether the new entity was carrying hidden parent subsidies in its reported margins.

For a CFO on the sell side, getting the standalone financials right is the difference between commanding a clean multiple and defending a messy data room for six months. For a CFO on the buy side, understanding what those financials actually represent, and what they obscure, is the only way to underwrite the deal with confidence.

How standalone carve-out financials are built

Building the standalone P&L from parent allocations

The starting point is identifying every cost that the carved-out business consumed but did not pay for directly. Parent allocations typically cover four categories: corporate overhead (legal, finance, HR, communications), shared technology infrastructure, intercompany financing, and tax consolidation benefits.

Each must be replaced with a "standalone cost," meaning the estimated cost the business would incur if it had to procure that service independently from Day 1. The accountants and advisors go line by line. The result is a standalone cost structure that will almost always be higher than what the historical financials showed, sometimes by 200 to 400 basis points of EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition → margin.

Take a concrete example. Suppose a parent company is carving out its industrial coatings division with $500 million in revenue. The division historically reported $75 million EBITDA because it paid a $10 million annual charge for shared services. Independent standalone analysis reveals that equivalent IT, finance, and HR services would cost $22 million annually. The adjusted standalone EBITDA drops to $63 million. At a 10x multiple, that is a $120 million difference in enterprise value before you have negotiated a single thing.

Restating intercompany revenue at arm's-length prices

Less discussed but equally important: revenue may also need adjustment. Intercompany sales to parent affiliates at transfer prices that would not survive an arm's-length test need to be restated. If the division sold $30 million of product to a sister business at a cost-plus-5% transfer pricetransfer priceThe prices charged when units of the same company trade goods, services or IP across borders, set to satisfy tax authorities and reflect market value.View full definition →, but market pricing for third-party customers would be cost-plus-20%, the audited standalone financials must reflect the economic reality, not the intercompany convenience.

Allocating pensions, shared debt and TSA costs

Balance sheet complexity is the other major fault line. Defined benefit pension obligations, environmental liabilities, and shared debt facilities must be allocated between the parent and the carved-out entity based on defensible methodologies: headcount ratios, revenue contribution, specific legal agreements. There is no single correct answer here, and that ambiguity is precisely where deals generate friction. The buyer will argue for more liabilities to land in the carve-out; the seller argues the opposite.

Transition service agreements (TSAs) add another layer. When the carved-out business cannot replace parent services on Day 1, the parent continues providing them for a fee during a transition period, typically 12 to 24 months. The TSA fees, their duration, and the exit path determine whether the standalone cost estimates in the financials are credible. A poorly structured TSA can inflate the apparent standalone margin during diligence and leave the buyer with a cost surprise once the TSA expires.

When can a CFO simplify carve-out allocations?

The honest answer is that standalone basis accounting applies to every carve-out where external financing or a third-party sale is involved. There is no discretion there. But CFOs regularly face pressure to compress the timeline and use simplified allocation methodologies to get financials to market faster. The temptation is understandable: proper carve-out financials can take four to six months to prepare and audit, which is long in competitive sale processes.

The risk of shortcuts is asymmetric. If the financials turn out to have understated standalone costs, the buyer can walk, reprice, or pursue post-closing claims. Hewlett-Packard's acquisition of Autonomy in 2011 is the canonical cautionary case of financial statements not representing economic reality, and while the circumstances were different, the pattern of discovery-after-closing is what carve-out shortcuts produce at smaller scale, reliably and expensively.

Where simplified approaches are defensible: internal reorganizations with no external transaction, or very small carve-outs below SEC significance thresholds where audited financials are not required. Even then, management should understand the standalone cost gap before signing heads of terms, because a buyer's advisor will find it regardless.

The other honest tradeoff is that rigorous standalone accounting occasionally reveals that a business is worth less than the parent believed. That is valuable information. Selling a business based on inflated historical allocations, only to have the buyer reprice at the eleventh hour, costs more in time, fees, and reputational capital than an honest early assessment would have.

A carve-out valuation anchored in properly constructed standalone financials gives both parties a shared factual base to negotiate from. CFOs who invest in that foundation early, before the buyer's advisors are in the data room, control the conversation. Those who do not spend the back half of the deal defending numbers they should have scrubbed at the start.