Stranded Cost Analysis

The parent may be left with a disproportionate cost structure after the sale.

Client challenges

  • Negative economies of scale result in higher costs for the parent
  • Post carve-out, the parent’s fixed overhead cost are shared over fewer business units
  • Business unit heads are taken by surprise when they get charged higher management costs
  • Direct negative EBITDA impact post-closing

How we can help

  • We help negotiate with suppliers to minimize the impact of lower economies of scale
  • we calculate the impact of stranded costs and enter it into the communication to the Market
  • We calculate the impact on the recharges to the remaining business units
  • We include the stranded costs in the parent’s KPI’s, budgets and forecasts

Key benefits

  • negotiate with suppliers from a stronger pre-deal position
  • no negative surprises in communication to the Market
  • KPI’s, budgets and forecasts are adjusted to reflect the changes in overhead and supplier costs

Lessons learned

  • Faced with the need for cost reduction, management commonly fails at execution
  • Inability to deal with competing priorities during a time of transition
  • insufficient resources to execute
  • failure to follow through tends to plague parent in its bid to avoid saddling unnecessary costs
  • Parents can take 1 to 3 years to recover EBITDA%

Stranded Cost Analysis 1

Recent Stranded Cost Analysis experience