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Managing cash in a private equity carve out

Managing cash in a private equity carve out
Posted by John Champion January 28, 2019

When a private equity firm carves out a business, a new company is snapped into existence. Whereas previously the new company had been a part of a larger whole, it now needs to learn to stand on its own two feet quickly.

To help manage this process, a Transitional Service Agreement (TSA) is negotiated. For the period stipulated on the TSA the newly carved-out company will have access to the main body company’s infrastructure (such as head office treasury functions, etc.)

Therefore, as the newly carved-out company scrambles to get itself in order, the TSA end date can feel like a cliff edge approaching at speed.

Abundant capital looking to be deployed

In their Q3 2018 Private Equity Deals Insight report, PwC predicted that carve-outs and divestures would drive the majority of upcoming private equity deal activity. According to PwC, this trend will be influenced by two key factors:

  1. Large corporations looking to divest non-core or non-performing business units and,
  2. Private equity firms seeking to deploy cash reserves which now stand at record levels

A business, carved out from a large corporate parent and finding itself with a new private equity owner, will experience shocks on a number of levels as it adjusts to its new ownership structure.

One of the most profound changes a newly carved out or divested business will experience is that they must now become self-sufficient from a funding and liquidity management perspective.

Negotiating the Transitional Service Agreement

When negotiating the TSA, the Private Equity backers and new company management must focus on obtaining the required support from the previous parent and secure access to the information needed to manage cash in the new entity.

Access to debtor and creditor ledgers

Without the information contained in debtor and creditor ledgers, upcoming bill schedules, and other records of committed cash flows, building a cash forecast becomes nigh on impossible.

Therefore, one of the first items on the TSA needs to secure access to these files, allowing the new company to build their own systems of storing this data that can be updated frequently.

Access to bank accounts and bank account information

Approved personnel will need reporting and payment access for all relevant bank accounts.

While this information might be deemed as sensitive, the new company will not yet have had the opportunity to set up new accounts and have built new processes, therefore access to the old accounts for the duration of the TSA is necessary while the new systems are built.

Previous cash forecasts

The last cash forecasts produced by the “parent” company contain valuable information. The newly carved out company will need access to these with granular breakdowns of corresponding assumptions and drivers, so that they can replicate the model as a starting point.

Where to focus

While the TSA is active, the new company needs to use the access and support it has to build the systems required to stand on its own two feet. Therefore, when the TSA end date hits, the new company is ready to embark on its journey as a stand-alone entity.

From a cash management perspective, to get everything under control there are a few key areas to focus on:

Daily bank balance reporting

By building a solid daily bank balance reporting process, the new company will be able to understand the total cash positions, therefore building a better sense of cash flows and aiding overall cash management.

Implement a rolling 13-week cash forecasting process.

This is the basic requirement that will usually be stipulated by the Private Equity backers of the new company. This should cover:

  • A classified view of recent actuals (i.e. last week)
  • Visibility over short-term payables and receivables
  • Visibility over mid-term cash flows modelled from business forecasts

For more detail, please see our post which outlines how a 13 week cash flow forecast can be built, and advice around its practical uses.

Building bank relationships

It is important to build relationships with the relevant banks to understand the remit of reporting options available. This includes electronic bank statements among others which should be able to be transferred into a system directly via an API.

Getting everything under control

The most efficient way to get all of these moving parts under control quickly is to use specialised cash flow forecasting software. Not only will this enable the process to be built and put into practice quickly, but it will also set the new company up for a best-practice cash forecasting and liquidity reporting process from its inception.

About CashAnalytics

CashAnalytics has helped many newly carved out companies from a range of industries to quickly build new cash forecasting and liquidity management processes.

We understand the strains on corporate finance and treasury teams, and that understanding is what helped us to build our software.

If you would like to see a demonstration of how software and automation can improve your cash forecasting processes, or would like to see the business case for introducing CashAnalytics to your company, please contact us directly.