The term carve-out is used in many different sectors, from finance to insurance and everything else in-between. Before you can understand what the term means in relation to business, you first need to understand the terms general meaning.

General Meaning Of The Term

The basic definition of carve-out, relevant to no specifics, is to ‘remove from a large whole’. In some instances, the term relates to the establishment or creation of something through painstaking efforts. By looking at the terms synonyms it becomes much easier to get a good idea of what carve-out actually means. Synonyms include remove, takeaway, withdraw and take.

How, When, Why & Where Is It Used?

The term itself can be used as a way of describing something or in the business world it defines a certain type of corporate reorganisation. Within the finance sector this term could mean two things. Firstly, it could be the term used to describe a fractional spinoff from a parent firm. Secondly, it could relate to the creation of a new company that operates within a fresh market that the parent company has not yet used.

Within the insurance sector, this term is used to describe how a certain insurance policy works. Usually the term carve-out means, in this instance, that the insurance service is not covered via a main policy but in fact bought separately to complement the typical policy available.

Going back to how the term translates in the business world, a carve-out is where a company is not directly selling a business division outright but instead owners may sell an equity stake in the business. Alternatively a carve-out can mean that a company is going to spin off a separate business division while still recalling an equity stake for itself.

Carve-out Strategy

Generally speaking, the business term carve-out is used to describe a strategy. The strategy provides an alternative to a total divestiture within a company. There are many reasons why a company may use a carve-out rather than implementing a total divestiture, but the most common reason is because the business is so deeply integrated it would be almost impossible to sell the unit off whilst still keeping it in funds.

Another reason for using a carve-out could be that the company would like to maintain a certain amount of governing over the business unit.

Although a carve-out usually means a business unit will still be very much content to its parent company, there is another carve-out strategy, which allows the company unit to stand alone as its own separate company. In this case, the company unit does not sell shares publicity, but rather it uses current investors as shareholders.