The Carve-Out Deal That Needed a Bridge, Not Just a Closing

The situation

Manuel trained as a physiotherapist before he built a small group of outpatient rehabilitation clinics across southwestern Ontario. His business partner, Tesfay, had spent years as a construction project manager before joining Manuel to lead facility buildouts and expansion. Together they ran a company with clinics in several mid-sized cities, and they were close to the largest deal of their careers: acquiring a cluster of outpatient rehabilitation clinics based in Woodstock, being sold off by a larger, diversified healthcare services company as part of a broader restructuring.

In merger and acquisition terms, this was a carve-out: rather than buying an entire company, Manuel and Tesfay's business was acquiring one division out of a much larger corporate structure. The Woodstock clinics generated solid revenue and had a loyal patient base, and the purchase price under discussion sat in the range of $35 million, reflecting several years of cash flow along with the value of long-term leases and clinical staff. On paper, the division looked like a clean addition to Manuel and Tesfay's existing group. Their lawyers at Treadstone Law were retained to run due diligence and negotiate the purchase agreement on the buyer's side, working alongside Selam, who led the deal team for the seller.

What the due diligence found

Carve-out deals carry a risk that whole-company acquisitions usually do not: the division being sold was never built to stand on its own. Inside a large corporate parent, a single division rarely has its own payroll system, its own information technology infrastructure, or its own contracts with suppliers. Instead, it draws on shared services that the parent company provides to all of its divisions at once. Treadstone's due diligence team asked for exactly this picture early in the process, and what came back confirmed the concern.

The Woodstock clinics had no standalone payroll system of their own; staff wages were processed through the parent company's centralized payroll platform, which also handled several other divisions the buyer was not acquiring. Patient billing, including the submissions made to provincial and private insurers for physiotherapy and rehabilitation services, ran through a shared clinic management and billing system owned and licensed by the parent, not by the division being sold. The clinics' phone systems, scheduling software, and even the email addresses staff used to communicate with patients belonged to the parent company's shared information technology environment. None of these systems, contracts, or licences were included in the assets being transferred under the draft purchase agreement.

This is the defining risk of a carve-out. Absent a plan, the moment the deal closed, the Woodstock clinics would legally belong to Manuel and Tesfay's company but would have no way to pay their own staff, no way to bill for the treatment they delivered that day, and no functioning phone or booking system to bring the next patient through the door. A shortfall of $35 million in purchase price is a negotiation. A payroll run that cannot be processed, or two or three weeks of unbilled patient visits piling up with no system to submit them, is an operational emergency that erodes the value of the very business being bought.

What we did

1. Mapped every shared dependency before drafting continued. Rather than negotiating the purchase price and closing mechanics first, Treadstone's team paused to build a full inventory of every system, contract, licence and service the Woodstock division relied on that sat with the parent company rather than the division itself. This inventory covered payroll, billing and clinic management software, information technology and email, insurance arrangements, and even the master lease under which several clinic locations operated, which was held at the parent company level and not assigned to the individual clinics.
2. Proposed a transition services agreement as a condition of closing. A transition services agreement, often shortened to a TSA, is a contract under which the seller agrees to keep providing certain shared services to the buyer for a defined period after closing, usually in exchange for a fee, while the buyer stands up its own replacement systems. Treadstone raised this early with Selam's team as a non-negotiable piece of the deal structure, not an afterthought to be sorted out after signing.
3. Negotiated the scope and length of the transition period service by service. Payroll and billing needed to continue running through the parent's systems for several months, long enough for Manuel and Tesfay's company to migrate staff onto their existing payroll provider and license their own clinic billing platform. Information technology and email needed a shorter transition, since the buyer's group already had spare capacity on its own network. Each service got its own timeline in the agreement rather than a single blanket transition period that would have been too short for some services and unnecessarily long, and costly, for others.
4. Built in exit ramps and clear pricing for each service. Transition services agreements can quietly become a source of leverage for the seller if the buyer has no real alternative but to keep paying for services indefinitely. Treadstone negotiated fixed monthly fees for each service, a right for the buyer to exit any individual service early once its own replacement was ready, and a firm outside date after which the seller's obligation to keep providing every service ended regardless of how the migration was going.
5. Confirmed the payroll and billing transfer plan with the operational teams on both sides. Legal terms on paper only work if the people running payroll and billing on the ground actually execute them. Treadstone's team required written confirmation from both companies' operations staff, ahead of closing, that the payroll cutover date and the billing system migration plan were realistic and resourced, rather than relying on the agreement alone.
6. Held the transition services agreement as a closing condition. The purchase agreement was drafted so that closing could not occur until the transition services agreement was fully signed by both companies. This meant Manuel and Tesfay's company was never at risk of closing the purchase and discovering, only afterward, that the seller was unwilling to commit to keeping the shared systems running.

The outcome

The transaction closed several months after due diligence began, at a purchase price close to the original $35 million figure, with a signed transition services agreement in place covering payroll, billing, information technology and the shared clinic lease arrangements. Because the agreement was a condition of closing rather than a promise to sort out details later, the seller had every incentive to negotiate its terms seriously rather than let them slide.

On the day the deal closed, Woodstock clinic staff were paid on schedule through the seller's payroll system under the transition agreement, patient visits were billed without interruption through the existing clinic management software, and phones and scheduling kept working exactly as they had the week before. Over the following months, Manuel and Tesfay's operations team migrated payroll onto their existing provider, brought the clinics onto their own billing platform, and transferred the individual clinic leases out of the parent company's master lease and into the buyer's name, all within the windows set out in the agreement. No patient billing was lost, no payroll run was missed, and the transition costs, paid to the seller under the agreed fee schedule, were built into the deal's budget from the outset rather than appearing as a surprise afterward.

Because the risk was caught during due diligence and addressed in the deal structure itself, the outcome from the outside looked uneventful: a clinic group changed hands and kept running. That quiet continuity was the result of specific, deliberate work identifying every shared dependency before the purchase agreement was finalized, not a fortunate default outcome of a straightforward acquisition.

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