You have been asked to brief family members on the issues involved by answering the following questions: m. What are equity carve-outs?

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You have been asked to brief family members on the issues involved by answering the following questions: m. What are equity carve-outs?

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Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to raise about $18.3 million in new capital. Because Randy’s currently has a debt ratio of 50% and because family members already have all their personal wealth invested in the company, the family would like to sell common stock to the public to raise the $18.3 million. However, the family wants to retain voting control. You have been asked to brief family members on the issues involved by answering the following questions:
m. What are equity carve-outs?

Explanation & AnswerSolution by a verified expert

Explanation

Equity carve-out is a process where a parent company differentiate its subsidiary company as a standalone company and sell some of the stock of the subsidiary company but not more than 20% to the general public. In such a situation, the parent company holds a controlling stake in the subsidiary and can also help the subsidiary in fulfilling its capital requirements.
Equity carve outs are also performed to diversify the operations of a business and splitting a business into two separate units. This helps the companies to focus on two separate activities of the company effectively and can increase the profitability, both of the entities can achieve the required goal collectively.

Verified Answer

Equity carve-out is a process where the holding company differentiates its subsidiary company as a separate entity and issues some of its stock to the general public but holds a controlling stake in the subsidiary company.

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