Answers / Financial Due Diligence
How do you handle a carve-out in FDD?
An advanced Financial Due Diligence question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
Key challenges: (1) Determine standalone costs – what's currently allocated from parent and at what rate? (2) Identify stranded costs – costs the parent retains that were shared. (3) Build pro forma P&L as if the entity operated independently. (4) Assess shared IT systems, licenses, personnel. (5) Evaluate Transitional Services Agreement (TSA) terms and duration. Carve-outs typically require 50–100% more FDD effort than standalone targets.
WHAT INTERVIEWERS LISTEN FOR
- ✓Determine standalone costs
- ✓Identify stranded costs
- ✓Build pro forma P&L
- ✓Assess shared systems and personnel
- ✓Evaluate TSA terms
COMMON MISTAKES
- ✗Ignoring stranded costs
- ✗Assuming historical allocations are accurate
- ✗Underestimating FDD effort
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