Project Farnworth — Corporate Carve-Out IC Memo
A 4-hour Investment Committee Memo (Carve-Out) case study with a complete model answer
Modeled After
Fortress Investment Group
The investment committee memo Fortress Investment Group is reported to set on a divisional carve-out where no standalone financial history exists, requiring the candidate to build the standalone cost base and the separation costs before any return can be underwritten.
Structure and exercise format are modeled after Fortress Investment Group — the investment committee format the firm is reported to use. The company, the carve-out and every figure in this case are entirely our own.
The Situation
Culverhouse Industries, Inc. is a diversified industrial holding company with four reporting segments.
Farnworth Motion Systems
- Sector
- Industrial motion control — precision actuators, servo drives and linear motion components for factory automation, semiconductor handling and medical devices
- Size
- Geography
- United States
- Ownership
- Situation
The Prompt
You have four hours. Build a model and write a memorandum to the investment committee.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
Segment note extract — Motion Systems, FY2026E
PDFUnlockDiligence provider's standalone cost estimate
PDFUnlockDraft transition services term sheet
PDFUnlockSeparation cost estimate
PDFUnlockManagement plan and working capital schedule
PDFUnlockArranger's commitment letter
PDFUnlockBlank model template
XLSXUnlock
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 240 minutes.
PART 1
Carve-Out Build — 57 cells
PART 2
TSA and Separation — 106 cells
PART 3
Operating Model — 87 cells
PART 4
Sources and Uses — 34 cells
PART 5
Cash Flow — 90 cells
PART 6
Debt Schedule — 120 cells
PART 7
Returns — 18 cells
PART 8
Price and Ability to Pay — 57 cells
PART 9
Sensitivities — 63 cells
PART 10
The memorandum
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished memo and Excel model are in the solution set below.
- 01
Read the prompt for what it does NOT ask for (0–10 min)
- 02
Build the earnings base before anything else (10–50 min)
- 03
Turn the services term sheet into a cost line (50–80 min)
- 04
Separation, working capital and the opening balance sheet (80–100 min)
- 05
The buyout mechanics, which are ordinary (100–150 min)
- 06
Returns, then solve for the price (150–170 min)
- 07
Price the terms and the downside cases (170–190 min)
- 08
Write the memorandum (190–240 min)
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Allocated corporate cost is not standalone corporate cost
A parent charges its divisions a share of central overhead on some convention — revenue, headcount, assets. It is a bookkeeping entry inside a consolidation. It was never negotiated by the division, it does not reflect what the division consumed, and it is emphatically not what the same functions cost to buy in the market. The segment result is struck after that charge, so the first move in any carve-out build is to add it back and start again from the divisional line before any corporate cost at all.
The functions with a zero in the allocated column
Some corporate functions never appear in a segment note because the parent supplied them out of a group program and never charged anyone: an insurance placement written at group level, or the statutory audit of an entity that did not need one because it was consolidated. On day one they are real invoices. A build that only adjusts the lines the seller gave you will miss every one of them, and they are among the least contestable numbers in the whole estimate.
Dis-synergies that are not corporate functions
Leaving a parent costs money in cost of sales as well as in overhead. Group purchasing rebates on direct material disappear. A group freight rate card disappears. And an intercompany book sold at a transfer price has to reprice to arm's length when the counterparty stops being a sister division. None of these is a corporate function, so a build that stops at the function-by-function table is short by all of them.
A transition services agreement is priced, not free
The parent runs some functions for a while at a fee, usually with step-ups that make staying expensive. The fee is a price, not a cost, and it can sit either side of the standalone run-rate of the functions it covers. When it sits below, the first year's earnings are flattered by a subsidy. When it steps above, the separation year is punished — and punished twice, because for part of that year the buyer is paying the stepped fee and running its own stack at the same time. Neither year is run-rate and the plan has to say so year by year.
Stranded cost is the seller's problem and the buyer's leverage
Not all of the allocation disappears when the division does. Some goes with it, some can be restructured away over a year or two, and some is permanently stranded at the parent. While the services agreement runs, the parent is recovering a fee against a cost base it was going to carry anyway — which is why the agreement is the seller's stranded-cost bridge, why the step-ups exist, and why a longer term at the opening rate is worth more to a buyer than the fee alone suggests.
Separation costs money twice, and the halves behave differently
The capitalized half — an enterprise resource planning carve, a network and data center build, physical site separation — creates an asset and is depreciated. The one-time operating half — rebranding, customer re-registration, recruiting, interim management, entity formation — is charged below Adjusted EBITDA in full, because it does not recur and capitalizing it into the story would flatter both the earnings and the exit. Both are cash, both are funded at close, and the timing of each belongs in the model explicitly.
The working capital peg
Carve-out transactions deliver working capital and cash on a normalized basis, and the peg is the level at which the target is delivered. It matters here because the carve-out balance sheet reflects the parent's group payment terms with suppliers the division will no longer buy through, and holds no service-parts buffer because the parent's central distribution held one. The gap between the presented level and the normalized standalone requirement is funded by somebody at close, and which somebody is a negotiation worth real price.
The same debt is two different credits
Leverage quoted on the segment line and leverage quoted on the standalone line are the same dollars against two different denominators, and they differ by roughly a turn. A seller's adviser will quote the flattering one. The arranger sizes on the standalone line and every covenant in the commitment letter is measured against it, which is why the distinction matters to a lender as much as it matters to the buyer.
Fixed-charge coverage, not interest coverage
Interest coverage ignores capital expenditure and tax entirely, which flatters a business that is spending a separation program through its cash flow. Fixed-charge coverage is the ratio the credit agreement actually sizes on, and on a carve-out the gap between the two is the separation program. Quote the one the counterparty sizes on, not the one that reads better.
The standalone cost estimate is management's, and it is optimistic
Nobody in the target has ever bought a statutory audit, hired a general counsel or negotiated an insurance placement for this entity, so the estimate of what those things cost is a projection made by people with an interest in it being low. That is the most contested number in a carve-out — more contested than the multiple. The memorandum's job is to price it: run the build light by a stated proportion, show what it costs in price, and name the diligence that would settle it.
Day-one readiness is a risk, not always a line item
Systems, executive hires, product requalifications with customers and continued component supply from the parent are what decide whether the business can operate on the morning after close. Some of them can be sensitized and some cannot: a missed medical-device requalification window is a lost account, not a line in a schedule. That is why a carve-out recommendation attaches conditions to a price rather than only naming a price.
Solving for price when exit equity is fixed
When the debt quantum is committed in dollars and the plan is unchanged, the equity value at exit does not move with the entry price. That makes the ability-to-pay solve closed form rather than iterative: discount exit equity at the hurdle over the hold to get the equity the hurdle permits, add the funded debt, and subtract everything in uses that is not the purchase price. Understanding why it is exact is worth more in an interview than the answer itself.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: memo and Excel model, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Carve-out standalone cost build
- —Transition services agreement scoping
- —Separation capex and one-time costs
- —Underwriting a business with no standalone history
- —Day-one readiness risk
- —Recommendation with a stated hurdle
Memo
The written recommendation and how it was reached
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the memo, the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and Memo (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Farnworth — Corporate Carve-Out IC Memo
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
Why is this not just an LBO with a different cover?
Because in an LBO the company exists. You start from a reported earnings figure, adjust it at the margin, and spend your time on structure and returns. In a carve-out the reported figure describes a segment inside a parent, not an entity, and the first and largest piece of work is constructing the entity's earnings: the corporate cost it will actually pay rather than the one it was charged, the functions nobody ever billed it for, the group benefits it loses on the way out, and the intercompany revenue that reprices when the counterparty stops being a sister division. The buyout mechanics underneath are ordinary. The build on top of them is the exercise, and it is where the marks are.
Where should the four hours actually go?
150 minutes on the model and 90 on the memorandum. Inside the model, give the carve-out build and the transition services schedule the first 40 and do not move past them until day-one standalone earnings is settled, because nothing downstream means anything until it is. The template leaves 632 cells across 226 distinct formulas, which is 39.8 seconds per distinct formula on the model half of the clock and 14.2 seconds per produced cell — comfortable if you build in order and impossible if you spend the first hour on a peer set nobody asked for.
Do I need comparable companies or a discounted cash flow?
No, and building either is a scoring error rather than extra credit. The price here is a negotiation against a stated minimum, the exit is a declared multiple assumption, and the committee underwrites to a return against a stated hurdle rather than to a present value against a discount rate. There is no discount rate anywhere in the case. If you want to show valuation judgment, spend it on the exit multiple assumption and on what happens if the business earns no re-rating at all — that is the sensitivity the committee will actually ask about.
How do I decide what belongs in the transition services scope?
The seller's draft tells you, and then you argue with it. The functions a parent will run for you are the ones that live on its systems and can be metered — finance and accounting processing, information technology, payroll and benefits administration, an insurance placement. The functions it will not run are the ones that require somebody to be accountable for your company: a chief financial officer, a general counsel, a treasurer, a board, an auditor. That second list is the day-one list, and it is the one that decides whether the business can open its doors, because none of it can be hired in the week after signing.
What should I insist on in the sale agreement?
Solve for each term separately and let the arithmetic rank them. In this case the two that carry real price are who funds the separation program and where the working capital peg is struck; the transition services fee rate carries far less than candidates expect, because it is a single-digit adjustment to one cost line for eighteen months. Also insist on things that are not price at all: a long-term supply agreement for any component the parent's own plants make, rather than a services schedule, because a services agreement expires and a supply agreement has a price and a term.
How should the memorandum be structured?
Recommendation first, then the evidence, then the appendix. Give the earnings bridge its own exhibit near the front — a committee reading a carve-out looks for that page before anything else. Then the transition services agreement and separation, the returns at the price on the table, the ability to pay with each negotiated term priced, day-one readiness, what the carve-out accounts do not tell you, and the walk-away. Answer the question about the hurdle premium in a paragraph rather than leaving it: it was asked, and an unanswered question reads as an evasion.
The carve-out accounts are audited, aren't they?
No, and that is worth a paragraph of its own. Carve-out financial statements are constructed by the seller under its own allocation policy. They are not audited segment data and they are not the financial statements of any entity that has ever existed. Every allocation inside them is a diligence item, and in practice most of them run in the same direction, because the party choosing the policy is the party selling the business. That is exactly why the build starts from the divisional line before any corporate charge rather than from the segment result.
What is the interviewer's most likely follow-up?
Some version of 'what would you pay, and what would have to be true?'. The first is answered by the ability-to-pay solve, which turns a readout into a negotiating position. The second is answered from the diligence file: name the assumption that dominates, say what evidence would settle it, and say what happens if the evidence goes the other way. A third one is worth preparing because it sounds sympathetic and is not — whether the standalone cost base could come down with scale. It can, eventually; it cannot on day one, and the day-one number is the one the price is struck on.
Does this format still come up?
Constantly, and increasingly. Corporate portfolio reviews produce a steady supply of divisional carve-outs, and sponsors that will underwrite them treat the standalone cost build as a distinct capability rather than a variation on a buyout. It is also a very efficient interview exercise, because it is almost impossible to fake: a candidate either reconstructs the earnings base or they do not, and thirty seconds of scrolling through the bridge tells an interviewer which.
About This Investment Committee Memo (Carve-Out) Case Study
Investment Committee Memo (Carve-Out) case study for private equity interviews. 240-minute format covering carve-out standalone cost build, transition services agreement scoping, separation capex and one-time costs. Includes the full prompt, a written memo, a tied-out Excel model and an audio walkthrough.
This case study sits in Private Equity, under Investment Committee Memos. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
240-Minute Format
The time limit a real assessment would give you
Memo
Included in the model answer
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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