Zero-Based Budgeting in Carve-Out Integrations

𝗭𝗲𝗿𝗼-𝗕𝗮𝘀𝗲𝗱 𝗕𝘂𝗱𝗴𝗲𝘁𝗶𝗻𝗴 is one of the robust toolkits for value creation - praised for driving cost discipline by challenging every expense and rebuilding budgets from scratch. When integrating a carved-out entity, buyers can’t simply inherit the Parent’s cost base. Carve-out integrations demand 𝗳𝗶𝘁-𝗳𝗼𝗿-𝗽𝘂𝗿𝗽𝗼𝘀𝗲 𝗼𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗺𝗼𝗱𝗲𝗹 𝗮𝗻𝗱 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹𝘀 which are reflective of the true operations of the Target. This effectively means building a clean-sheet P&L and balance sheet.

Using 𝗭𝗕𝗕 principles, buyers can rethink financials from the ground up and rebuild them aligned to the Target’s true operations -

- Dedicated costs transfer as-is
- Allocated costs (shared services/ IC charges/ overheads) rebuilt bottom-up
- Future growth and associated costs should be accounted for

𝗪𝗵𝗲𝗻 𝘁𝗼 𝗮𝗽𝗽𝗹𝘆?
Right around the time of due diligence -when you're assessing standalone viability and designing the future-state operating model. This is the moment to apply clean-sheet thinking.

𝗧𝗵𝗲 𝗿𝗲𝘀𝘂𝗹𝘁?
A powerful opportunity to reset the cost base, eliminate inefficiencies, and build lean, scalable, fit-for-growth operations. For PE funds and Corporate Deal Teams, applying ZBB principles during integration design 𝗰𝗮𝗻 𝘂𝗻𝗹𝗼𝗰𝗸 𝟭𝟱 -𝟮𝟬% 𝗰𝗼𝘀𝘁 𝘀𝗮𝘃𝗶𝗻𝗴𝘀 without compromising on growth enablers.

𝗞𝗲𝘆 𝗪𝗮𝘁𝗰𝗵-𝗼𝘂𝘁:
Aggressive cost-cutting must be 𝗯𝗮𝗹𝗮𝗻𝗰𝗲𝗱 with future growth. The former should not cannibalize the latter.