A carve-out is financed like any acquisition, with senior debt, buyer equity and sometimes a note from the seller, but the loan is sized on earnings the division has never reported on its own. The buyer has to build them: carve-out financials, a standalone cost model that replaces every service the parent provided with a quoted cost, and usually a quality of earnings review that tests both. A transition services agreement covers the gap while systems move. Lenders lend on standalone earnings after those costs, not on the division's contribution inside the parent.
- What the loan is sized on
- Standalone earnings, after the buyer pays for everything the parent used to provide
- Documents unique to a carve-out
- Carve-out financials, a standalone cost model, the transition services agreement
- Quality of earnings
- Expected by most lenders; on SBA loans of $3 million or more (excluding real estate) required from 1 October 2026
- Usual deal form
- An asset purchase of the division's customers, contracts, inventory, equipment and staff
- Biggest risk a lender sees
- Costs the parent absorbed that nobody has priced yet
Why a carve-out is harder to finance than a whole company
When you buy a whole company, the lender starts from its tax returns, financial statements and bank accounts. A division or product line has none of that. Its revenue sits inside the parent's statements, its costs are partly its own and partly allocated from a corporate center, and its cash has always swept into the parent's accounts. The lender's first question, what does this business earn, has no document behind it.
Five things make carve-outs different, and each one shows up in underwriting:
- No standalone financials. The parent may produce a divisional P&L for management, but it measures the division's contribution, not what it would earn alone, and it was never audited or filed.
- Allocated overhead. Finance, HR, IT, insurance, legal and sometimes rent are charged to the division by formula, which may be higher or lower than what the division will pay on its own. Often it is lower.
- Shared customers and contracts. Big customers may buy under a master agreement with the parent covering several product lines. Those contracts have to be split or assigned.
- Shared systems. The division runs on the parent's ERP, payroll and email. Separating them costs money and time, and until it is done the buyer depends on the seller.
- Intermingled working capital. Receivables, payables and inventory sit in the parent's ledgers with no clean line around the division's share.
From the parent's P&L to one a lender will lend on
The work of financing a carve-out is translating what the parent reports into what the buyer will actually earn. The table below walks through the lines that usually move, and what a lender needs to see for each.
| Line | How the parent reports it | What the lender needs |
|---|---|---|
| Revenue | Division sales, sometimes including sales to other parent units | Third-party revenue only, with any sales to the parent shown under a supply agreement that survives the sale |
| Cost of goods | Direct costs plus shared plant, freight or purchasing | Costs at the terms the buyer will get, not the parent's volume pricing |
| Corporate overhead | An allocation by revenue, headcount or square footage | Removed and replaced, line by line, with the buyer's actual cost |
| Payroll and benefits | Parent plans, parent insurance rates | The buyer's own payroll, benefit plans and insurance quotes for the transferring staff |
| IT and systems | Part of a corporate charge | The cost of the transition services agreement, then the cost of the buyer's own systems |
| Premises | Shared space, sometimes rent-free | A lease or sublease at a market rent, or the cost of a move |
| Working capital | Inside the parent's ledgers | A defined opening balance sheet and a working capital target for closing |
The result is standalone earnings: what the division earns after the buyer pays, at real prices, for everything the parent used to provide. That is the figure the loan is sized on, whether the lender measures it as EBITDA for a cash-flow loan or as cash available for debt service. The adjustments work the same way as pro forma EBITDA, except that in a carve-out most of them go against the buyer.
The standalone cost model and the carve-out QoE are the deal
Buyers new to carve-outs tend to treat the standalone cost model as a spreadsheet exercise and the quality of earnings report as a formality. Lenders treat them as the two documents that decide the loan: the divisional P&L shows what the business did inside the parent, and only these two show what it will earn without it.
A standalone cost model a lender will accept has three features. Every allocated cost is removed and replaced by a specific cost with a source behind it: an insurance quote, a payroll provider's proposal, a software subscription price, a lease. The model separates recurring standalone costs, which reduce earnings every year, from one-time separation costs, such as a new ERP implementation or the move to a new building, which are funded at close and belong in sources and uses. And it shows the cost of the transition services agreement for as long as it runs, then the cost of the buyer's own replacement.
A simple illustration, in plain numbers. The parent's divisional P&L shows earnings of 2,000 after corporate allocations of 600. The buyer removes the allocations, which lifts earnings to 2,600, then prices what it will actually spend on the same functions: 900 a year. Standalone earnings are 1,700, not 2,000. There are also one-time costs of 400 for systems and relocation, which the financing has to fund at close. A loan sized on 2,000 would be lent against earnings that do not exist, which is exactly what the bridge is there to prevent.
The quality of earnings review in a carve-out also tests the carve-out financials themselves: whether revenue was correctly attributed to the division, whether intercompany sales are priced at arm's length, whether the balance sheet captures the division's real receivables and inventory, and whether the cost model has missed anything. On SBA loans, from 1 October 2026 under SOP 50 10 8.1, financial due diligence is required on every change of ownership, and a QoE report on acquisitions of $3 million or more excluding real estate. Most conventional and private credit lenders expect one on any carve-out of meaningful size.
Lenders cannot size debt on figures the parent never produced. The carve-out financials and the standalone cost model are not supporting documents; they are what the loan is made against.
The transition services agreement, as a lender reads it
Almost every carve-out closes before the division can run on its own. The transition services agreement (TSA) has the parent keep providing payroll, IT, accounting, warehousing or whatever else is needed, for a fee and a fixed period, while the buyer builds its own. For the lender it is both a comfort and a risk.
- Scope. The lender checks that every service the division needs on day one is either in the TSA or already replaced. A service missing from both is an operating gap the day after closing.
- Term and extensions. A TSA that ends before the buyer's systems can realistically be live forces a rushed migration. Lenders prefer a term with room to spare and a right to extend at a known price.
- Price. The TSA fee belongs in the forecast for as long as it runs. Parents sometimes price it at cost to smooth the sale, which is fine, provided the model does not assume the same low cost continues once the TSA ends.
- The exit plan. A lender wants to see who will run the migration, what it costs and when each service moves. That plan usually becomes part of the lender presentation.
- Supply between buyer and parent. Where either side keeps buying from the other, the supply agreement's term and pricing feed straight into standalone revenue and margin.
Lenders commonly test coverage twice: once with the TSA in place and once on the fully separated cost base. If coverage only works during the TSA, the loan is sized on the lower figure.
Customers, contracts and consents
A division's customers are often the parent's customers. They may buy under a master agreement covering several product lines, or the division's revenue may depend on the parent's name, certifications or approved-vendor status. The buyer needs each significant contract assigned, split or re-signed, and the lender will make the most important of those consents a condition of closing.
Carve-outs also create a concentration question of their own. If the parent will be a large customer after the sale, the lender treats it like any other large customer: how long the supply agreement runs and whether it can be terminated for convenience. See customer concentration in an acquisition.
How carve-out deals are usually structured and financed
Most carve-outs are asset purchases. The buyer's new company acquires the customer contracts, inventory, equipment, intellectual property and staff, and the parent keeps its legal entity and its liabilities. For the lender that is usually cleaner: it takes a first lien on assets with no inherited history, and the collateral is defined by the purchase agreement's asset schedule.
| Source | Role in a carve-out | What it depends on |
|---|---|---|
| Senior cash-flow loan | The core of the debt, sized on standalone earnings | A credible cost model and QoE; senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA |
| Revolver or asset-based line | Funds working capital from day one, since the division has no cash of its own | Clean receivables and inventory data carved out of the parent's ledgers |
| SBA 7(a) | Possible for smaller divisions, up to $5 million | Earnings the lender can verify without the division's own tax returns, a business valuation, and the change-of-ownership rules |
| Seller note from the parent | Bridges a gap in price; signals the parent's confidence | The parent's willingness to hold paper, which corporate sellers often resist |
| Earnout | Ties part of the price to post-close performance | Accepted by some conventional lenders if subordinated; SBA prohibits an earnout to the seller in a change of ownership it finances |
| Buyer equity | The cushion under the debt | Enough to cover one-time separation costs as well as the lender's required share of the price |
Working capital deserves particular attention. A division bought as assets arrives with receivables and inventory but no cash, and its first payroll may fall before its first customer payment. A revolver in place at closing often makes the first months work, and the working capital target decides how much the division brings with it.
SBA financing is possible but harder in a carve-out than in a whole-company purchase. An SBA lender verifies earnings against tax returns, and a division has never filed its own, so the case rests on carve-out statements and the parent's cooperation in supporting them. The deal also needs an independent business valuation where the amount financed, less appraised real estate and equipment, exceeds $250,000, and the loan for the purchase cannot exceed that valuation. And because SBA limits the seller's role after a complete change of ownership to consulting for up to 12 months (up to 24 months under SOP 50 10 8.1 from 1 October 2026), an SBA lender will expect the transition services agreement with the parent to end inside that window.
What goes in a carve-out lender package
On top of the usual acquisition documents (the letter of intent, the buyer's personal financial statement and resume, and the target's latest full year of figures), a carve-out file needs:
- Carve-out P&L and balance sheet for the latest full year and year to date, with the basis of preparation explained
- A line-by-line bridge from the parent's divisional figures to standalone earnings
- The standalone cost model, with the quote behind each replacement cost, and a schedule of one-time separation costs
- The draft transition services agreement and any supply agreement with the parent
- A customer list showing which contracts transfer, which need consent and which are shared
- The QoE report, or its scope if it is under way
Once the documents are in, Transparent builds the full lender package — financing model, lender presentation, blind teaser and underwriting memo — in a day, with the standalone bridge set out so a credit committee can follow every adjustment. See what the package contains and how we underwrite a file before it goes to lenders.
Common questions
- Can I get a loan to buy a division that has no financial statements of its own?
- Yes, but only once someone produces them. Lenders lend on carve-out financials prepared from the parent's records, bridged to standalone earnings and usually tested by a quality of earnings review. Without those, a lender has nothing to size the loan on.
- Do lenders count the parent's corporate allocations as real costs?
- No. They remove the allocations and replace them with what the buyer will actually pay for the same services. If the replacement costs more than the allocation, standalone earnings fall, and the loan is sized on the lower figure.
- How does a transition services agreement affect the loan?
- Its fee goes into the forecast while it runs, and lenders check that it covers every service needed on day one and lasts long enough to migrate. Coverage is often tested again on the fully separated cost base after the TSA ends.
- Will the parent company carry a seller note?
- Sometimes. Corporate sellers often prefer a clean exit, but a parent that believes in the division may hold a subordinated note or accept part of the price as an earnout in a conventional deal. Lenders read a parent's willingness to hold paper as evidence the standalone figures are realistic.