How to Buy a Carve-Out Business | Caroline Chapdelaine Interview

Deal facts

purchase price

$1.6m total ($600k upfront + $1m earnout over 3 years)

sde ebitda

EBITDA ~$300k (pre-overhead absorption)

revenue

~$2m

financing structure

All-equity for $600k upfront (three partners pooled cash); $1m earnout over 3 years cash-flowed from contracts; no acquisition debt; post-close SBA 7(a) loan ~$500k secured against ~$1m in equipment assets

notes

Carve-out from a biomed parent company (North Star Photonics). Three partners: Caroline (minority equity, CEO role), chief scientist (majority equity), and a board-member/sales partner (second-largest equity). ~$1m in lab/equipment assets on balance sheet. Clean room relocation to San Jose required significant unplanned capex post-close. Moving costs came in ~3x original quote.

Why this business

Caroline had a defense industry background (operations, supply chain at Northrop Grumman, L3 Harris, Orbital ATK) and was specifically targeting defense contractors because she understood the technology, contracts, and relationships. She had done consulting work for the photonics spin-out a year prior and knew the people. When the partners approached her, she was convinced by the premium, differentiated technology (fiber optic gyroscope components with a wide moat from trade secrets and decades of PhD expertise), the quality of the team, and a desire not to keep waiting for a better deal. She accepted a minority stake because she wanted the chance to lead a company and recognized the partnership made success more likely than going alone.

What's working

• Highly differentiated, proprietary photonics technology (IOCA components for fiber optic gyroscopes) with a wide competitive moat built from decades of trade secrets and PhD expertise that even large primes cannot easily replicate or reverse-engineer
• Strategic customer dependency — the primary customer's own success depends on North Star Photonics surviving, leading to prepayments and active support through the transition
• Asset-heavy balance sheet (~$1m in equipment) that was initially seen as a liability but enabled an SBA 7(a) loan without personal guarantees when the company hit a cash crisis
• Strong, experienced technical team (13 employees, half scientists/engineers, half skilled assemblers, many with 20-30 years on this exact technology) who stayed through the carve-out
• Partnership structure: three complementary partners (CEO/operator, chief scientist, and a sales board member with 20+ years in related industries) provided resilience during the crisis and broader decision-making capacity
• Government contracts providing baseline recurring revenue once production resumed

What's hard

• Carve-out structure meant losing all parent-company infrastructure (HR, IT, facilities) instantly, creating a de facto startup situation that most banks refused to finance
• Mandatory relocation of a complex clean-room facility within two months of close; moving costs came in roughly three times the original quote
• Primary customer required a formal production and quality audit at the new San Jose facility before allowing any shipments, creating a ~4-month revenue gap (October close to April approval) that nearly exhausted all equity
• Cash crisis forced the company to ask employees to take temporary pay cuts (offset with PTO), and management had to explore equity raises, personal loans, and bank debt under pressure
• Remote CEO situation: Caroline is based in Salt Lake City while the business operates in San Jose, requiring bi-weekly travel and reliance on the chief scientist for day-to-day operations
• Single-technology, narrow-market business (only government customers currently) with key-person risk concentrated in a small team of senior scientists
• Psychological toll: Caroline described facing her lowest personal lows, developing anxiety and insomnia, and having to reckon with the threat of complete failure for the first time despite a decorated military background

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