Allocating Corporate Overheads

Core Objectives

• Reflect the true economic burden of shared services on the carve-out business.
• Provide buyers with a defensible EBITDA bridge from parent financials to standalone results.
• Quantify stranded costs and inform the parent’s post-divestiture cost-reduction plan.

Allocation Principles

• Causality – The chosen driver must correlate with how the cost is actually consumed.
• Consistency – Apply the same driver across business units for comparability.
• Transparency – Document logic, source data, and calculations for audit and buyer diligence.
• Materiality – Focus detailed analysis on high-value cost pools; apply simplified methods to immaterial items.

Step-by-Step Allocation Process

1. Create a Cost Pool Inventory
   List every overhead account by function: finance, HR, IT, facilities, R&D, executive, etc.
2. Select Allocation Drivers
   Match each cost pool to a single driver:
   • Headcount for HR, payroll systems, office space.
   • Revenue for brand marketing, treasury, and board-level costs.
   • Transaction count for accounts payable or order-to-cash support.
   • System usage metrics for IT infrastructure and applications.
3. Extract Driver Data
   Capture historical headcount, revenue, transaction volumes, and system logs for the same periods as the financial statements.
4. Calculate Allocations
   Multiply total cost pool by the carve-out entity’s share of the driver (e.g., 12 % of global headcount).
5. Validate Results
   Benchmark allocated cost per employee or cost per dollar of revenue against internal and external comparables; investigate outliers.
6. Document Methodology
   Prepare a workbook showing cost pools, drivers, allocation percentages, and dollar results. Include narrative explaining why each driver was chosen.
7. Incorporate Standalone Adjustments
   Add incremental costs the carve-out will incur to replace parent services that will not be replicated through TSAs (e.g., independent audit fees, new CFO).
8. Review With Auditors and Buyers
   Provide the allocation file during due diligence; be ready to walk through logic, data sources, and reconciliations to parent accounts.

Recommended Driver Cheat-Sheet 

• Corporate HR – Headcount: Direct correlation to service usage
• Finance & Accounting – Transaction count: Workload tied to invoices and journals
• IT Infrastructure – Number of users: Licenses and support scale with users
• Facilities & Real Estate – Square footage: Occupancy-based consumption
• Executive Leadership – Revenue: Benefits all business lines proportionally
• R&D Platform Services – Direct R&D spend: Aligns with benefit earned

Common Challenges

• Weak time-tracking or user-metric data for IT applications.
• Pushback from business leaders when allocations reduce their reported profitability.
• Double-counting with intercompany recharges already reflected in management accounts.
• Overlooking global functions (e.g., risk, ESG reporting) that sit outside standard cost centers.

Deliverables Checklist

• Cost-Pool Inventory with mapping to general-ledger accounts.
• Allocation Workbook showing drivers, percentages, and allocated dollars for three historical years.
• Standalone Cost Bridge reconciling parent EBITDA to standalone EBITDA.
• Stranded-Cost Analysis for the parent, including mitigation plan.
• Methodology Memo ready for auditor and buyer review.

Stranded-Cost Mitigation for the Parent

• Identify costs with no allocation base post-carve-out (e.g., excess HQ space).
• Develop a cost-reduction timeline aligned to TSA exit dates.
• Build savings into the parent’s forward plan to protect margins after divestiture.

Well-supported overhead allocations underpin credible financials and give both seller and buyer a clear view of future cost structures—reducing negotiation friction and post-close surprises.