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Read moreDivestitures are pivotal moments for organizations seeking to streamline operations and unlock value. A clear, credible standalone cost analysis of what it will take to run the carved-out business independently can be the difference between a good deal and a great one. In today’s market, buyer diligence teams expect a solid estimate of what the separated business will cost to run on its own. Without it, buyers will likely fill gaps with their own assumptions — often lowering the valuation. A seller that builds a standalone cost estimate grounded in a realistic operating model can support pricing, increase buyer confidence and reduce downside risk during diligence.
The current cost structure of a business rarely fits once it becomes a newly independent company. Sellers should start by defining how the new standalone company (NewCo) will operate, then build the cost model to match. When those cost changes — often affecting earnings before interest, taxes, depreciation and amortization (EBITDA) — are tied to a clear future operating model, the assumptions are easier to explain and defend with buyers. Key design choices include:
In a recent industrials carve-out, our EY-Parthenon team worked with management to design a leaner way to run the business and reflect that design in the standalone cost estimate. The work identified US$50 million of excess costs, which supported an increase of more than US$250 million in enterprise value at the deal’s 5x valuation multiple. Without a detailed standalone estimate, that value likely would have shifted to the buyer.
Standalone cost analysis is critical in divestitures because it helps sellers explain the business, support pricing and protect value in diligence. A strong model clarifies the cost base and strengthens the seller’s position in negotiations. By defining a realistic operating model and tying estimates to financial data, sellers can increase buyer confidence and reduce renegotiation risk with the following actions:
Ethan Barath of Ernst & Young LLP contributed to this article.
It’s essential that sellers justify pricing, build buyer trust and reduce diligence risk. A standalone cost analysis — grounded in actual financials and supported by well-chosen benchmarks — makes the cost base clearer and strengthens the seller’s case in negotiations.
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