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%