Why the allocation is not the answer
Inside a group, a division consumes finance, HR, legal, IT, security, procurement and facilities without ever seeing an invoice. Group accounting assigns it a share of that cost through an allocation formula, usually a percentage of revenue or headcount, set years ago for management reporting rather than for a transaction.
That number is almost never what the business would actually pay as an independent company. Sometimes it is generous, more often it is far too low, and in either case it is indefensible in diligence because it was never built from the ground up.
Buyers know this. Every credible acquirer will construct their own standalone operating model, and where their number is higher than yours, the difference comes out of EBITDA, and then out of price, multiplied by whatever multiple you had agreed.
Building it properly
Work bottom-up, function by function, and answer one question for each: what would a company of this size, in this sector, with these obligations, truly spend?
Finance. A controller, an accounts function, an audit, a year-end. If the division has never had its own audit, budget for the first one and for the remediation the first one produces.
People. HR, payroll, recruitment, benefits administration, and an employment law relationship. Benefits pricing is the trap here: a 200-person company does not buy healthcare at the rate a 12,000-person group does, and the gap is real money.
Technology and security. Cloud spend at standalone commit levels rather than the group's negotiated enterprise rate. Identity, endpoint, monitoring, and whatever the group's security programme was providing invisibly. SOC 2 or ISO certification maintained independently.
Legal, insurance and compliance. Counsel, D&O, cyber, professional indemnity, and any sector licensing. Insurance is another place where the group's scale was subsidising the division.
Facilities and general. Space, if the division was sitting inside group offices. Travel policy. Software licences that were part of enterprise agreements and now need to be bought directly.
Stranded cost is the other half
Every dollar of group cost that was serving the division does not disappear when the division does. Some of it is truly variable and can be removed; a meaningful share is not, and stays with the parent as stranded cost.
This is a board conversation, not an adviser conversation, and it needs to happen before the process launches. A transaction that looks accretive on the sale price alone can be materially less attractive once stranded cost is honestly quantified, and discovering that after signing is a bad way to discover it.
Transition services are a bridge, not a solution
A well-designed transition services agreement gives the buyer time to stand up their own functions. It does not change what those functions cost at the end of that period, and buyers model the post-TSA steady state, not the TSA period.
Where TSA pricing is set below true cost, sophisticated buyers will notice and adjust. Where it is set punitively above, it becomes a negotiating point that costs goodwill at exactly the wrong moment.
What good looks like
A standalone model with the basis of each line documented, a stated view on which costs are avoidable and which are stranded, and a reconciliation from the group allocation to the standalone number that a buyer's finance team can follow in an afternoon.
That document does two things. It removes the largest source of post-LOI re-trading, and it signals that the seller understands their own business, which changes how every other estimate in the data room is received.
A worked shape
For a division at thirty million of revenue previously carried inside a group at an allocated overhead of six percent, the standalone build almost always lands higher. Finance and audit, an HR function and benefits at small-company pricing, cloud and tooling off the enterprise agreement, insurance bought alone, and a security programme that was previously invisible because the group ran it.
Where the group allocation was one point eight million, a bottom-up build commonly produces two and a half to three and a half million. On a four times revenue multiple, that difference is worth several million of enterprise value, and it is the number the buyer will arrive at whether or not you do.
The point of building it yourself is not to reach a lower figure. It is to reach the right figure with evidence, so that the conversation is about your model rather than about theirs.
The two ways this goes wrong
Understating it. The buyer's diligence corrects the number, and the correction arrives after exclusivity has been granted, when there is very little room to argue. A seller who has been optimistic here loses twice: once on the adjustment and again on credibility, because every other estimate in the data room is now suspect.
Overstating it out of caution. Less common and still expensive. A standalone cost base padded for safety reduces EBITDA, and the multiple applies to the reduced figure. Conservatism here is not free.
The answer to both is the same: build it from evidence, document the basis of each line, and be able to defend it rather than to defend a position.
Who should do the work
The division's own finance lead, with support from group finance and an external adviser who has built these before.
It cannot be done entirely by the group, because the group does not know what the division actually consumes. It cannot be done entirely by the division, because they do not see what the group spends on their behalf. And it should not be outsourced entirely, because the model has to be defended in a room by someone who understands every line.
Budget six to eight weeks of real effort. It is the single highest-return preparation activity available to a corporate seller.
Editorial Team · Published for orientation, not as advice on a specific transaction. Any figure cited is orientation, not a valuation. See market notes.