Stranded costs. The number that surfaces in next sponsor diligence.

Stranded costs come in four common shapes. Duplicate platform spend, where Newco stood up a new system but never decommissioned the parent equivalent that still has a contract running. Over scoped headcount, where Newco hired to absorb a function but kept paying the seller for parts of the same function past exit. Untransferred contracts, where a vendor agreement is still in the seller's name and Newco pays through a passthrough that never ends. Allocated overhead, where corporate cost the parent used to absorb gets re billed to Newco at a higher unit rate than a standalone organization should carry.

The cost is not theoretical. On a typical mid-market carve-out, stranded costs can run anywhere from 50 basis points to several full points of margin. On a sale at an EBITDA multiple, every dollar of stranded cost compresses exit value at the same multiple. A sponsor that did not pressure test for stranded costs at TSA exit usually finds them when the next buyer's diligence team does.

The mechanism for avoiding stranded costs is not a single workstream. It is the discipline of treating exit as a structured program, with a documented end state for every service line, contract and asset, and a closeout step that proves the seller side cost has left Newco's run rate. Without that discipline, stranded costs are not detected until they are baked in.

Where the term appears

In value creation plans, as a guardrail on post-close cost base. In quality of earnings reports during exit diligence, as a reconciliation line. In governance committee minutes during the final months of a TSA. In sponsor portfolio reviews, where carve-out portfolio companies are benchmarked against clean platform companies. In the next buyer's working capital and EBITDA bridge.

Related terms

Exit Ramp · Pass-Through · TSA Extension Fee · Value Creation Plan · Workstream