Carve-out
What is a carve-out in terms of HR?
A carve-out is the process of separating a business unit or subsidiary from a parent organization. This unit may be sold to external stake holders or other investors, or reorganized for more independent operations (but often still under some influence of the parent company). A carve-out allows an organization to capitalize on a business segment that may no longer align with its core operations.
Why do organizations go through carve-outs?
Sharpening focus
If a business segment isn’t central to a company’s core mission, carving it out allows leadership to streamline operations and redirect resources toward the core business.
Raising capital
Selling a stake in the carved-out unit can generate funding without the need to divest the entire business.
Unlocking value
A carve-out may let the smaller unit thrive on its own terms, potentially increasing its valuation. This is common when it serves a different customer base or has different growth potential.
Regulatory compliance
Some carve-outs are required due to anti-trust regulations or as a condition of a merger or acquisition.
Increased innovation
A carved-out unit can move faster and make decisions without the red tape that often comes with being part of a large corporate structure.
How often do carve-outs occur in an organization?
Carve-outs don't happen every day, but they're not unusual either—particularly with big companies. They commonly arise during restructuring, mergers, acquisitions, or when the company is strategically shifting. For HR teams, they're a high-impact event. Although the business objective can be strategy or profit, the people side is equally important—maintaining talent, safeguarding morale, and creating a healthy post-carve-out culture.
What happens during a carve-out?
This depends on how the carve-out is structured legally and operationally. Generally, three paths are possible:
Contracts are transferred
If the carve-out leads to a newly formed entity, employees may have their contracts novated (legally transferred) to the new company.
New contracts issued
Sometimes, the new entity offers fresh contracts. This may involve renegotiated terms or continuity clauses.
Benefits re-evaluated
The carved-out unit may adopt the parent company’s benefits for continuity, or it might restructure its offerings to suit its new scale or budget.
What are the factors that contribute to carve-out?
Underperformance of a division
If one unit drags down profitability or growth, leadership might choose to carve it out to isolate risk or improve efficiency.
Investor pressure
Shareholders may advocate for separating parts of a business to unlock higher valuations or returns.
M&A activity
Carve-outs often occur after acquisitions where not all business lines are relevant to the new owner's goals.
Innovation incubation
A business unit with unique growth potential might be carved out to grow without interference from the broader corporate structure.
How does a carve-out work?
Carve-outs typically follow a step-by-step process:
Strategic review
Leadership identifies the segment to be carved out and justifies the move.
Planning phase
HR, finance, legal, and IT map out the separation roadmap.
Execution phase
Systems, employees, and assets are transitioned. Contracts are revised or reassigned.
Stabilization
After the separation, both the parent company and the new entity work on building internal stability, culture, and operational independence.
What is the difference between a carve-out and a spin-off?
Both carve-outs and spin-offs involve separating a business segment, but they have different structures and ownership. In a carve-out, the parent company divides one of its divisions to create a new company, usually holding on to some interest in it and potentially taking on outside investors or setting it up for sale. On the other hand, a spin-off makes the business unit an autonomous entity, where existing shareholders are given shares of the new entity and the parent company relinquishes control altogether.