A carve-out is the partial divestiture of a business unit in which a parent company sells a minority interest of a subsidiary to outside investors. A company undertaking a carve-out is not selling a business unit outright but, instead, is selling an equity stake in that business or relinquishing control of the business from its own while retaining an equity stake. A carve-out allows a company to capitalize on a business segment that may not be part of its core operations.

• In a carve-out, the parent company sells some of its shares in its subsidiary to the public through an initial public offering (IPO), effectively establishing the subsidiary as a standalone company.
• Since shares are sold to the public, a carve-out also establishes a new set of shareholders in the subsidiary.
• A carve-out allows a company to capitalize on a business segment that may not be part of its core operations as it still retains an equity stake in the subsidiary.
• A carve-out is similar to a spin-off, however, a spin-off is when a parent company transfers shares to existing shareholders as opposed to new ones.

In a carve-out, the parent company sells some of its shares in its subsidiary to the public through an initial public offering (IPO). Since shares are sold to the public, a carve-out also establishes a new set of shareholders in the subsidiary. A carve-out often precedes the full spin-off of the subsidiary to the parent company’s shareholders. In order for such a future spin-off to be tax-free, it has to satisfy the 80{7842809952b50c016c6adcac70849bbb6f5d8268c4bc67173252bb56b6b6b157} control requirement, which means that not more than 20{7842809952b50c016c6adcac70849bbb6f5d8268c4bc67173252bb56b6b6b157} of the subsidiary’s stock can be offered in an IPO

A carve-out effectively separates a subsidiary or business unit from its parent as a standalone company. The new organization has its own board of directors and financial statements. However, the parent company usually retains a controlling interest in the new company and offers strategic support and resources to help the business succeed. Unlike a spin-off, the parent company generally receives a cash inflow through a carve-out.