The Standalone Factory Model is an innovative ap-proach for designing and implementing M&A deals. A core feature of the Standalone Factory Model is the shortening of TSA runtimes by converting M&A-induced TSAs into Service Level Agreements (SLAs), realized through strategic outsourcing agreements.

1. Introduction

In recent years, there has been a noticeable increase in the complexity of M&A transactions. In particular, the increase in carve-out transactions in which specific business units or assets of a company are carved out and sold to another com-pany is crucial in this context. By contrast, a decline in M&A transactions can be observed in which ownership of an al-ready independent corporate unit changes hands. Further-more, transactions that combine asset and share deals add to the complexity.

In addition to strategic buyers, private equity firms are also involved in a significant proportion of M&A transactions. While strategic buyers can fill the gaps in functions or business processes created by the carve-out with their own value chain and generate synergies, private equity firms tend to manage these tasks by building up internal capacities, which is a costly and time-consuming process. In most cases, the value creation phase only takes place afterwards.

In this context, the Standalone Factory Model was developed as a new solution and implementation approach to enable private equity firms to carry out carve-out transactions faster and at significantly lower operating costs (OPEX). The Standalone Factory Model aims to transform Transition Service Agreements (TSAs) into strategic selective out-sourcing agreements in Service Level Agreements (SLAs).

TSAs are contracts between seller and buyer that regulate the provision of certain services by the seller after comple-tion of an M&A transaction to ensure a smooth transition and operation of the sold business unit. By implementing the Standalone Factory Model, this process can be shortened to achieve faster TSA exits and greater savings through lower TSA costs, as the sold unit achieves independence much earlier.

In addition, a reduction in operating expenses (OPEX), such as selling and administrative overhead (SG&A) or product-related costs of goods and services sold (COGS), can be achieved. This enables an EBITDA increase. Furthermore, a TSA replacement and the Standalone Factory Model leads to less depreciation through selective outsourcing services since the outsourcing service providers buy and depreciate the (IT) assets necessary for the TSA replacement. This in turn leads to an EBIT increase resulting from lower depre-ciation and the reduction of COGS and SG&A.

2. The Standalone Factory Model

The Standalone Factory Model is an innovative approach to designing and executing M&A deals, on both the buy and sell sides. A core feature of the Standalone Factory Model is the conversion of M&A-induced TSAs into Service Level Agreements (SLAs), realized using strategic, selective out-sourcing agreements. In this context, ‘selective’ refers to spe-cific business processes, sub-processes, functions, individual IT applications and IT infrastructure. The Standalone Fac-tory Model aims to reduce the limitations of conventional M&A approaches with long-term TSA. Traditional M&A ap-proaches often result in the long-term commitment of inter-nal employee capacities. This is because they must implement the necessary development activities for the ac-quired unit. At the same time, M&A approaches are less flexible considering the buyer's strategic goals and projects. In addition, there is no simultaneous expansion of internal competencies, as could otherwise be achieved through out-sourcing. The process compared to the traditional carve-out approach is shown in the following graphic.

Fig. 1 • Traditional Approach vs. Standalone Factory Model

Source: Deloitte

By replacing TSAs with selective outsourcing, the need to compensate for missing services by investing time and re-sources in internal development can be avoided. These de-velopment activities are often associated with increased operating expenses (OPEX), reduced efficiency due to a lack of economies of scale, and additional investments (CAPEX or one-time costs) for replacement projects. Typically, OPEX after these development projects are 20-50% higher than the costs for TSAs. In past projects, OPEX increases of up to 200% have been observed in some cases. By comparison, outsourcing services are around 10-30% lower than TSA costs. The resulting savings arise from the replacement of an outsourcing service with an internal structure. In this case, an OPEX reduction takes effect immediately. The value creation process here already takes place during the trans-action phase within the M&A deal cycle.

The Standalone Factory Model is particularly suitable for the ‘entangled services’, ‘commodity services’ and ‘shared services’ mapped within the TSA in carve-out transactions, such as support functions (HR, finance, accounting, control-ling, non-productive procurement, etc.) and commodity IT (infrastructure, security, cloud services, etc.). However, the Standalone Factory Model is not limited to commodity services, but is also suitable for core functions and value-driving IT.

In carve-out transactions, 50% or more of the TSAs are often IT-related (IT-TSA). The reason for this is that departments and business processes are mapped in IT applications and workflows. Thus, there are corresponding IT-TSAs in the applications for each of the business and process-related TSAs. Many IT-TSAs also originate from IT infrastructure assets and services. Commodity IT is suitable as a use case for the standalone factory model and will be addressed in more detail below. Commodity IT focuses on maintaining and securing the essential IT infrastructure that supports operations, and places a high value on stability, cost effi-ciency and service reliability.

The process for the Standalone Factory Model begins even before the contract for the purchase of a carve-out object is signed and includes the request for proposal from external service providers, the creation of service lots, the selection of one or more providers, the onboarding of the providers and the associated project management. This process of the Standalone Factory Model, based on an exemplary M&A process for carve-outs, is shown in the following graphic.

Fig. 2 • Standalone Factory Model in an Exemplary M&A Process of a Carve-out

Source: Deloitte

3. Case Study: PE firm acquired global catering company

The case study focuses on one of the most significant carve-out transactions in the German market in 2023. A private equity firm acquired a subsidiary of a German conglomerate with a global presence and the aim of developing the sub-sidiary into a standalone entity. The deal successfully achieved Day 1 status (as a divested entity) in November 2023 and is currently in the phase of establishing a stand-alone entity. The acquired company generated approxi-mately €1.9 billion in revenue at the time of acquisition and has more than 20,000 employees working in 120 locations worldwide.

In the pre-closing phase, a comprehensive standalone blue-print was created that outlined both the current and the global target IT operating models. These models covered critical areas such as IT infrastructure, cloud services, cyber security, and enterprise resource planning (ERP) systems. The blueprint was designed to address the needs of both central and regional structures within the organization. An analysis was conducted to understand the needs of each re-gion across the various work packages and functional areas, and to consolidate the global outsourcing requirements. This affected approximately 30% of all IT processes, which had to be taken over by the seller and rebuilt by the service provider.

A detailed estimate was carried out to determine the one-time IT costs necessary to support the project which laid the foundation for the initiation of extensive outsourcing measures. Using the Standalone Factory Model, sourcing bundles and lots were created in the first phase of this out-sourcing initiative based on the requirements for each work package. A detailed vendor analysis was carried out to iden-tify the most suitable service provider. A series of ‘speed dat-ing’ meetings were conducted with several potential providers. Ranked against a set of strategically designed metrics, the providers were narrowed down to a few, from which the final outsourcing partner was selected. Compre-hensive due diligence sessions were conducted with the providers, who then submitted detailed offers, after which contract negotiations were carried out. After several discus-sions, the outsourcing partner, the migration schedule, and the scope of services were defined.

In addition, the target state for the IT organization was de-fined using industry benchmarks and best practices. This target state serves as a strategic roadmap and guides the transformation of IT functions to achieve optimal efficiency, scalability, and alignment with overarching business goals. By setting clear benchmarks and goals, the organization can measure progress and ensure that the transition to the new IT operating model is both smooth and successful.

To ensure effective coordination and management during this complex process, a Carve-Out Management Office

Der Käufer hat bereits begonnen, TSAs zu kündigen und deutliche Fortschritte bei der Einrichtung der ausgegliederten Einheit als selbstständig operierende Organisation zu machen. Die verbleibenden TSAs sollen in der Hälfte der ursprünglich geplanten Zeit beendet werden, wodurch der Käufer reduzierte Kosten durch einen günstigen Preisunterschied zwischen TSA- und Outsourcing-Kosten erzielt.

(CMO) was established. This is designed to ensure regular information exchange, provide critical updates across re-gions and work streams, and support end-to-end guidance throughout the outsourcing process. The CMO plays a critical role in facilitating communication and ensuring that both the buyer and seller remain informed about the pro-ject's objectives and progress. Centralized TSA management takes place within the CMO, coordinating the management of the TSA exits and seeking early replacements.

The buyer has already begun terminating TSAs and is making significant progress in setting up the outsourced unit as an independently operating organization. The re-maining TSAs are expected to be terminated in half the originally planned time, enabling the buyer to achieve re-duced costs through a favorable price difference between TSA and outsourcing costs.

4. The Standalone Factory Model as a blueprint for all cor-porate functions

The above case study demonstrated a selected case of how the Standalone Factory Model can be used for complex carve-out scenarios. Fortunately, the model can also be used on both the buy-side and the sell-side. On the sell-side, the number of TSAs can be significantly reduced in carve-outs, since many shared functions and interdependencies can be allocated directly to an outsourcing service provider instead of mapping them within TSAs and operating them from the RemainCo.

In addition, the Standalone Factory Model offers scalability and flexibility that are aligned with the changing needs of private equity companies. While IT risks, such as threats in cybersecurity and compliance issues, are mitigated and a se-cure transition from TSA-provided services is ensured. This approach is also adaptable for enterprise customers in-volved in M&A transactions who are seeking to optimize their IT operations, achieve cost efficiencies and shorten the time required to bring their spun-off business units to mar-ket. By leveraging the Standalone Factory Model, compa-nies can systematically transfer IT functions from TSAs to outsourced services, significantly reducing reliance on TSAs during the integration phase of an M&A transaction.

Additionally, the concept of the Standalone Factory Model can of course be applied equally to other business functions. This includes all operational functions of a company that are part of a spin-off with TSAs. Examples include:

During a carve-out, the need to strategically outsource fi-nance and accounting functions often arises. Companies benefit from the expertise of specialized service providers while creating space to focus internal resources on key strategic initiatives. The Standalone Factory Model can be applied here – for example, to the administration of financial transactions, account reconciliation and financial reporting during the carve-out. In this context, the outsourcing provider promises an improved financial overview and more efficient accounting processes.

In the context of human resources (HR), the Standalone Fac-tory Model enables the outsourcing of functions such as payroll, recruitment, and employee services, including HR compliance, during a carve-out. It is possible to hire an ex-ternal HR service provider to apply modern HR technolo-gies and best practices, leading to more efficient HR processes and improved compliance management during the carve-out process.

Finally, in the context of a carve-out, the Standalone Fac-tory Model can also be utilized to outsource logistics and supply chain functions that are integrated into TSAs to specialized service providers. The external service provider has the potential to improve efficiency, cost control, scalability, and flexibility during the spin-off process.

5. Conclusion

In summary, it can be demonstrated that the Standalone Fac-tory Model can accelerate the TSA exit process in carve-outs and simplify standalone transformations for private equity firms. It enables earlier value creation through OPEX reduc-tion and EBITDA increase, as the TSA usage time and asso-ciated costs are reduced through earlier TSA replacement. In contrast to the traditional standalone approach, there is no need to first address operational costs at the TSA level after building internal capacity to replace TSA services be-fore value creation can take place. Instead, this model im-mediately delivers measurable, enterprise-value-enhancing value creation by replacing TSAs with outsourced services.