In Divestiture, Plan ERP Separation Carefully

Choosing the right approach to ERP separation is a prerequisite for success in many divestiture transactions, but it’s often one of the most difficult parts.

During uncertain times and challenging economic conditions, divestiture can offer organizations a way to salvage value and raise capital. By shedding noncore businesses and assets, they can focus on investing in core business offerings to maximize overall portfolio value.

Divestiture transactions can also be an opportunity to transform and modernize ERP platforms for the parent company and/or the divested business unit, either as part of the transaction execution or post-deal completion. However, there’s a catch. While the benefits of divestiture can be considerable, so too can the challenges—especially those associated with ERP separation.

Most major companies today rely heavily on ERP technology as part of the overall technology landscape to support critical business and corporate functions across the organization, including finance, sales, procurement, and HR. The separation of the ERP platform during divestiture can play a significant role in determining the success of the transaction itself, yet it is often the most complex project involved, requiring coordination and support across all the major workstreams.

“ERP separation is often underestimated in terms of complexity for both the divested entity and the parent company,” says Kim Hales, senior vice president of IT at NRG Energy. “This challenge stems from dealing with systems and interfaces that are both upstream and downstream from the ERP—often numbering in the double digits. And if you are supporting the ERP for a divested entity through a transition services agreement, you have to support the planning of cutovers, data migrations, and licensing. Are you able to legally provide these services from the ERP and associated systems? You have to plan as completely as you can, and when you’re in the middle of an M&A, when everyone is being stretched in all directions, this often means getting a trusted partner to help.”

For these reasons, it’s important for CIOs to proactively develop a separation approach and start planning early in the deal phase.

Types of Divestiture Transactions

Divestiture transactions can be broadly organized into three categories:

  • Carve-out sale to a strategic buyer. Strategic buyers are typically in the same industry sector as the seller and are seeking either vertical or horizontal expansion along with synergies. In most cases, strategic buyers will look to absorb the carved-out business into their own ERP systems to capture synergy benefits, so a formal ERP separation strategy is not required.
  • Carve-out sale to a financial buyer. Financial buyers, on the other hand, are typically private equity firms looking to reduce costs and generate positive cash flow with the carved-out business. This type of firm typically will not absorb the carved-out business into an existing IT environment; instead, the carved-out company will need to develop a stand-alone ERP strategy of its own.
  • IPO separations. In these transactions, a company spins off the carved-out business unit into a new stand-alone, publicly traded company. The majority of such transactions are structured to be tax-free spinoffs in which the parent company may retain minority shares of the new company, but the spinoff company needs to achieve operational and financial independence on Legal Day One in order to satisfy tax rules.

Since only two of these types of divestitures typically involve ERP separation, it’s essential to understand the nature of the transaction at hand. For each of the two types in question, there are distinct considerations.

With long associated lead times and numerous interdependencies, ERP separations require early attention and informed decisions.

Financial Carve-Out Transactions

In financial carve-out transactions, the typical period between signing and closing is one to three months, with transition services agreements (TSAs) negotiated to provide IT and operational support until the buyer can fully separate the carved-out business from the parent company. In order to achieve separation within such a short time frame, the recommended approach is often logical separation, where two or more separate companies operate on the same instance of the ERP platform.

In these transactions, the seller is responsible for implementing logical separation while the buyer focuses on achieving TSA exit. In addition to logical separation planning and execution, CIOs will need to continue to provide oversight and guidance for the buyer’s ERP implementation progress and ensure the buyer exits the TSA as agreed.

In designing logical separation, the CIO at the selling company should consider the following key planning activities:

  • Confirm ERP technology contract terms. In particular, ensure the technology contract includes a right-to-use clause in order for the seller to continue to provide services under a TSA.
  • Define operational and financial reporting requirements. Implement different controlling areas and financial reporting for the parent company and carved-out business(es).
  • Design compensating controls. Ensure that users in both the parent company and the carved-out business do not have access to the other company’s transactions and reports, including internal and external interfaces.
  • Develop a TSA support governance structure. Define the governance model to include cost structure, review and approval of production break-fix and enhancement requests, and a service-level agreement by criticality. Also define the expected response time by the service provider.

IPO Separation Transactions

In an IPO separation transaction, the typical announcement-to-close period is between seven and 11 months; to achieve tax-free requirements, the new company will need to stand up an independent ERP platform on Legal Day One. CIOs supporting such a transaction will need to develop a physical ERP separation strategy and plan. Broadly speaking, that means choosing one of the following separation options based on separation costs, the complexity of business processes and systems, and the IT strategic road map:

  • Clone and delete. Clone the existing ERP platform for the spinoff and delete parent company data.
  • Transform while transact. Migrate the ERP platform to a cloud or SaaS version.
  • New platform migration. Migrate the ERP platform to a new fit-for-purpose software solution.

Once the CIO has finalized an ERP separation approach, the next step is to consider implementing processes, strategies, and technologies for risk mitigation, potentially including the following elements:

  • Cloud infrastructure. Leverage a cloud provider or hyperscaler to implement cloud infrastructure, enabling a faster infrastructure setup lead time compared with what would typically be possible using a traditional data center strategy.
  • Data separation. Identify comingled data between parent company and the spinoff and define an approach for data sharing and separation.
  • Talent retention. Identify high-performing IT personnel and develop a retention strategy using financial and/or nonfinancial incentives, potentially including retention bonuses and promotions or increased responsibilities.
  • Vendor selection. Develop an accelerated vendor selection process to identify and onboard a third-party partner for ERP separation services.
  • Contract separation. Negotiate an assignment clause in the ERP contract to transfer any excess licenses to the spinoff company, thereby minimizing stranded costs.


With long associated lead times and numerous interdependencies, ERP separations require early attention and informed decisions. By addressing key planning decisions and risks ahead of time, CIOs can support deal close, ensure Legal Day One objectives are achieved, and facilitate a successful divestiture transaction.

—by Mushtaque Heera, managing director, and Wayne Liu, specialist leader, both with Deloitte Consulting LLP


PUBLISHED ON: June 29, 2021 7:00 PM ET
