Stranded Costs: The Divestiture Number That Shows Up a Year Late

By the MeridianCogent team — built from working with integration offices, separation leaders and PE operating partners on M&A execution. This perspective is drawn from published divestiture research across the industry.

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Divestitures are supposed to improve the seller's position. Shed the non-core asset, take the proceeds, run a tighter business. That is the paper the board approves.

The research says something less comfortable. Deloitte's analysis of divestitures over the past two decades found that 51% of divesting companies experienced a profitability drop greater than 3.3 percentage points in the first year after the deal. Not a smaller business with the same margins — a smaller business with worse ones.

Stranded costs are a substantial part of why.

What actually stays behind

A stranded cost is a recurring operating expense that was allocated to the divested business and remains with the seller after the business has gone. The allocation disappears from the management accounts. The cost does not.

The mechanism is unglamorous. A data centre lease does not shrink because one business unit left it. An enterprise software agreement priced at combined volume does not reprice mid-term. A shared services team sized for the pre-deal organisation still has the same headcount on Monday. Central functions — finance, legal, HR, IT — were built for a company that no longer exists at that scale.

IT and its associated infrastructure is usually the largest single component, which is unsurprising given how much of it is fixed in the short run and contracted over multiple years.

Industry sizing puts stranded costs at 20 to 40 percent of the divested unit's allocation. On a business allocated €10 million of shared overhead, that is €2 to €4 million a year that the seller keeps paying for capacity nobody uses.

The lag is what makes it dangerous

Deloitte's UK research on divestment outcomes found that among companies whose profitability dropped in the twelve months after a divestment, a majority also saw SG&A costs rise in relative terms — a median increase of 1.7 percentage points. More striking: three in five of those companies took four years or longer to recover.

Four years is long enough that nobody connects the recovery to the deal. The deal closed, the proceeds were booked, the transaction team moved on, and the margin drag became a general cost problem owned by whoever runs the remaining business.

That disconnection is the real risk. A cost that arrives immediately gets attributed to the transaction and managed as part of it. A cost that arrives as a slow margin decline over the following eighteen months gets reallocated across remaining business units, where it becomes invisible — and reallocation is what makes stranded cost permanent rather than painful.

Why the seller's own model hides it

The reason stranded costs are chronically underestimated is structural rather than careless.

Allocation is not a cost model. It is a convention for distributing shared expense across business units, usually by headcount, revenue or some negotiated rule. It tells you what the divested business was charged. It tells you nothing about what actually varies when that business goes.

The test is per line, and it is uncomfortable:

Whatever fails that test is the stranded cost estimate. It belongs in the deal model as a reduction to the seller's post-deal earnings, sitting next to the sale proceeds it qualifies, rather than in a separate analysis nobody reads at the same time as the price.

Sellers already know this is their problem

Deloitte's 2026 Global Divestiture Survey — 979 sellers and 569 buyers — found that sellers and buyers face different post-close pressures, and that stranded costs sit at the top of the seller list alongside TSAs and financial reporting. Buyers worry about talent retention, integration feasibility and supply chain redesign. Sellers worry about the organisation they are left holding.

The survey also captures the asymmetry underneath: sellers prioritise price, speed, certainty and execution reliability, while buyers prioritise strategic fit, synergies and long-term value creation. Sellers focus on value at close. Buyers focus on value after close. Both value speed, but sellers emphasise it more precisely because of stranded cost exposure — every additional month of a drawn-out separation is another month of carrying overhead for a business that is already sold.

What changes the number

Size it before signing, not after. A board that sees the stranded number at approval can weigh it against price, push for transitional service pricing that recovers more of it, and start the elimination programme at signing rather than at the end of the TSA. A board that sees it in the year-one review can only explain it.

Build the elimination curve against real calendars. Lease break dates, contract renewal dates, notice periods, severance timelines, decommissioning windows. Stranded cost does not come out when you decide it should; it comes out when the contract allows. That calendar is knowable in advance and it determines what is actually achievable in year one.

Run takeout alongside the buyer's TSA exits. Capacity goes idle the month a transitional service ends. If the elimination programme is not sequenced against the TSA exit schedule, the seller pays for that capacity twice — once in the TSA period when it is still being used, and again afterwards when it is not.

Keep it visible. The single most effective discipline is refusing to reallocate. A stranded cost bucket that sits in the management accounts and is uncomfortable to look at every month is a bucket somebody works to close. One that has been distributed across four remaining business units is not a bucket at all.

Lessons learned

The allocation is not the cost. Every stranded cost conversation that starts from the allocation percentage produces a wrong number. Start from variability.

It is a seller problem the buyer has no reason to solve. Nothing in the buyer's incentives makes them care, and nothing in a standard TSA makes them pay for it beyond the service they consume. If it is not priced into the deal, it is absorbed.

Speed is worth money here. Sellers who emphasise close certainty and separation speed are often accused of being impatient. They are usually the ones who have modelled the carrying cost.

A number in the board paper changes behaviour. Sizing stranded costs early changes what the organisation does, not just what it forecasts — which is the argument for doing the analysis even when the answer is uncomfortable.

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Sources: Deloitte 2026 Global Divestiture Survey (sellers n=979, buyers n=569); Deloitte research on divestiture profitability outcomes and stranded costs, including analysis of divestitures over the past two decades; Deloitte UK, "Unlocking value: approaching stranded costs in M&A"; BD Emerson stranded cost sizing analysis; Liberty Advisor Group on stranded cost analysis in strategic divestitures.