5 Steps to Model Management Fees and Central Costs in M&A Models

Modeling Management Fees and Central Costs in M&A

Management fees are charges an owner or sponsor bills a portfolio company for monitoring, board service, or advisory work. Central costs are shared corporate overhead and services at a parent or holdco that get allocated to operating entities. Model them cleanly and you will see normalized EBITDA, cash conversion, tax effects, and covenant room with fewer surprises.

This guide shows how to identify, normalize, and redesign these costs so your post-close results match the deal thesis. The payoff is better valuation discipline and fewer covenant and cash shocks after Day 1.

Why these lines move EBITDA and leverage

Most gaps between headline EBITDA and post-close run rate hide in management fees and central cost allocations. The job is simple to say and hard to do: separate ongoing from one-time, related-party from third-party, and what stops, starts, or changes after close. Accounting under IFRS and US GAAP dictates what hits EBITDA, what becomes interest or equity, and what lands in cash. That drives valuation and leverage headroom. Clarity here also improves lender confidence and deal certainty.

Step 1: Define the perimeter pre- and post-close

Start with documents and data. Use signed agreements and invoices, not narratives.

Inventory existing fees: Capture sponsor or owner charges such as monitoring, board fees, advisory retainers, transaction fees, and any waiver mechanics. Note change-of-control triggers and termination payments with timing and cash impact.
Map overhead allocations: List finance, IT, HR, legal, strategy, and procurement allocations. Record allocation keys, cost bases, markups, and which costs are step-fixed.
Flag embedded services: Identify managed IT, facilities, and outsourced payroll contracts likely to move to group vendors and estimate cost and timing effects.
Isolate deal costs: Record bank, legal, accounting diligence, insurance, fairness opinions, and financing or filing fees separately from operations.

Check legal survivability: Review management services agreements, fee letters, side letters, and board resolutions. Identify automatic termination on change of control and any close-date settlements.
Validate intercompany terms: Review intercompany service and cost-sharing agreements. Check benefit tests, markups, and transfer pricing support to sustain deductibility and avoid withholding or VAT traps.
Assess replace vs retain: Mark services the acquirer will replace versus those that remain local. Note regulatory licenses or data rules that limit centralization and affect timing.

Confirm payer and tax: Record legal entities, currencies, and tax treatment. Assess withholding on cross-border services, VAT or GST on intra-group charges, and permanent establishment risk if services occur locally.
Align with debt docs: Map ring-fencing in borrower groups and negative covenants restricting upstream payments. Align guarantees and security packages with planned cash movements.

Pull the share purchase agreement, TSA drafts, intercompany agreements, transfer pricing files, loan agreements and fee letters, advisor engagement letters, and board minutes. Under IFRS 3 and ASC 805, acquisition-related costs are expensed when incurred. Debt and equity issuance costs follow separate rules. Treat transaction fees accordingly rather than capitalizing them into purchase price. For background on differences in purchase accounting frameworks, see a concise overview of IFRS 3 vs ASC 805.

Step 2: Build the baseline and normalize EBITDA

Normalization is the bridge from reported historicals to decision-useful run rate. Use a TTM period ending near the reference date and adjust only on evidence. Build an earnings bridge so each change ties back to source data.

Classify persistence: Treat recurring operating charges like sponsor monitoring fees and central services that continue post-close as SG&A that hits EBITDA unless eliminated or replaced. One-off items such as diligence, signing bonuses, and change-in-control payments are period expenses in GAAP even if shown below Adjusted EBITDA for optics.
Handle financing costs: Present debt issuance costs net against debt and amortize via effective interest under US GAAP; under IFRS, incorporate into the effective interest rate. These do not touch EBITDA but reduce cash at closing and raise interest cost over time.
Add standalone needs: For carve-outs, add public or standalone costs such as audit, board, investor relations, SOX readiness, and insurance. Quantify TSA coverage and the run-rate replacement.

Tie to invoices: Build run rate by vendor, headcount, service line, and location. Validate with invoices, payroll registers, and service catalogs. For allocations, rebuild formulas and test against actual consumption.
Reconcile ledgers: Reconcile to the general ledger and segment disclosures. For public targets, match reported SG&A and disclosed alternative performance measure adjustments.

Prove eliminations: If the sponsor exits, monitoring fees usually go away. Show the termination letter. If a new sponsor adds fees, model the new agreement with rate, base, and escalation.
Price replacements: When removing allocations, add market-rate replacements. If acquirer services replace them, quantify internal cost to serve and required hires or licenses.
Phase timing: Align changes to TSA durations and ramp. Do not assume day-one elimination if systems migration or approvals are needed.

IFRS 3 and ASC 805 expense acquisition costs in the period incurred. You can still present Adjusted EBITDA, but the GAAP income statement and cash need to reflect reality. With IFRS 18 coming and scrutiny high, loose add-backs invite questions from boards and lenders. For a related perspective on what counts as an add-back, see this discussion of EBITDA add-backs.

Step 3: Design the pro forma operating model

A plan beats a slogan. Define who does what, where costs sit, and how money moves. Make it workable for accounting, tax, and treasury in a clean three-statement model.

Set service scope: Decide what centralizes at HoldCo or shared services, what stays local, and what outsources. List the service catalog, SLAs, and staffing.
Map systems: Inventory SaaS seats, ERP modules, and security tooling. These often drive step-fixed costs and ramp profiles.
Choose drivers: Anchor allocation drivers in consumption. Use headcount for HR, revenue or transactions for finance, and devices or users for IT. Avoid revenue-only drivers for labor-heavy functions.
Document markups: For intra-group services that pass the benefit test and are not shareholder activities, a cost-plus markup is expected. Many jurisdictions allow simplified markups for low value-adding services with proper documentation.
Paper the structure: Draft intercompany service and cost-sharing agreements. Align pricing and drivers with transfer pricing memos. Address indirect taxes and withholding. Include gross-ups where contracts require net-of-tax outcomes.
Respect ring-fencing: Confirm the ability to pay upstream fees and basket capacity under debt documents. If constrained, book costs where allowed or adjust covenants.
Lock TSA terms: For TSAs, set pricing, SLAs, and exit dates by workstream. Cost-plus or fixed-fee TSAs with escalation if extended are common. Phase-out schedules dictate when cash savings show up.

Step 4: Translate design into accounting, cash, and financing mechanics

Get placements right and cash flows straight so EBITDA, leverage, and liquidity stay aligned with your deal model.

Place income items: Ongoing management and shared services hit SG&A and reduce EBITDA unless a leverage covenant allows add-backs. Label add-backs precisely and tie them to executed agreements.
Expense deal costs: Acquisition costs are expensed under IFRS 3 and ASC 805. Capitalize debt issuance costs against debt and amortize as interest per ASC 835-30 or IFRS 9. Equity issuance costs reduce equity.
Model cash cadence: Show who pays what and when. If HoldCo incurs services and recharges OpCos, model intercompany payables and cash sweeps. Reflect withholding, VAT, and gross-ups. Use an indirect cash flow statement to reconcile EBITDA to cash.
Bridge to debt terms: Build a separate covenant EBITDA bridge to credit agreement definitions. Many allow unusual or non-recurring add-backs and run-rate savings, subject to caps and verification. Keep the math clean to avoid double counting. If you are new to these definitions, this guide to covenant modeling is a helpful reference.
Separate stand-up costs: Keep stand-up costs in period expenses. Some systems spend is capex, but cloud implementation is often expensed with limited capitalization exceptions.
Sync disclosures: IFRS 18 will change income statement categories and require disclosure of management performance measures. Map adjusted metrics to the new requirements in advance.

Step 5: Pressure-test and govern

A good model holds up to audit, tax review, lender diligence, and day-to-day operations.

Run sensitivities: Build high, base, and low cases for TSA duration, centralization speed, vendor pricing, and headcount ramp. Sensitize indirect tax recoverability and withholding by jurisdiction.
Keep evidence: Maintain agreements, invoices, allocation policies, transfer pricing memos, and board approvals. Lenders and auditors will ask for them.
Assign owners: Make the CFO accountable for run rate and reporting, Tax for transfer pricing and indirect tax, Legal for agreements, and IT or HR for transitions. Track milestones weekly through TSA exit.
Monitor KPIs: Track cost per user or ticket, TSA exit progress, realized savings versus forecast, recharges versus policy, and intercompany settlement to avoid trapped cash and covenant strain.
Audit compliance: Test adherence to intercompany terms and update markups and drivers as facts change to protect deductibility.

Mechanics and flow of funds

At corporates, HoldCo often originates fees and bills subsidiaries. The OpCo pays HoldCo, which pays vendors or bears retained costs. In sponsor deals, a monitoring fee can flow from OpCo to the sponsor’s management entity, subject to baskets and negative covenants. Cross-border payments can trigger withholding; model them as cash reductions at the payer and, if gross-up applies, added expense. Priority of payments in restricted groups follows the debt documents. Interest, mandatory amortization, and restricted payments come ahead of discretionary upstream fees. If upstream fees are material, confirm capacity and arm’s-length pricing. To see how issuance cost amortization flows through interest, make sure your debt schedule reflects effective interest.

Economics and the fee stack

Separate one-off from recurring. One-offs include adviser fees, diligence, fairness opinions, and deal insurance. Expense them in the period. Financing fees are capitalized against debt or reduce equity and are amortized via the effective interest method. Recurring charges include management services, board retainers, audit, D&O, and shared services. If debt funds deal costs, amortization flows through interest.

A small numerical illustration

Assume LTM GAAP EBITDA is 100 with SG&A of 50, including a 5 sponsor fee and 2 in stranded costs requiring replacement. The buyer removes the sponsor fee and uses a shared service center at 3 incremental cost. A TSA covers finance and IT for six months at 1 per quarter. Transaction costs are 8, debt issuance costs are 4 amortized over five years, and equity issuance costs are 2.

Run-rate impact: Eliminate 5 sponsor fee and add 3 for shared services for a net +2 run-rate EBITDA after TSA. TSA reduces EBITDA by 1 per quarter for two quarters, then drops.
Acquisition accounting: Expense 8 at close; exclude from Adjusted EBITDA but show cash out at closing. Debt issuance costs add roughly 0.8 per year of amortization if modeled straight line; equity issuance costs reduce net proceeds.
Taxes: If shared services are cross-border with 20 percent VAT and partial recovery, the non-recoverable portion is a cash cost; treat recoverable VAT in working capital.

Result: GAAP EBITDA dips at closing from acquisition costs, then improves by 2 after TSA. Covenant EBITDA likely excludes the 8 and may include the 2 run-rate savings, subject to caps and evidence.

Accounting and reporting notes

Deal costs: Expense business combination costs under IFRS 3 and ASC 805. Do not push diligence or advisory into purchase price.
Financing costs: Present debt issuance costs net against debt under US GAAP and amortize via effective interest; under IFRS 9, incorporate into the EIR. Equity issuance costs reduce equity. None affect EBITDA.
Intercompany elimination: Eliminate related-party transactions on consolidation. Use allocations in management reporting but align segment reporting with public guidance where applicable.
Adjusted metrics: Define Adjusted EBITDA clearly, reconcile to GAAP EBIT, and model credit agreement definitions separately.

Tax and regulatory touchpoints

Deductibility rules: Tax authorities require evidence of services and benefit. Keep intercompany agreements, detailed invoices, and transfer pricing files aligned. Avoid charging shareholder activities.
Indirect taxes: Check VAT or GST and withholding by country. Apply gross-ups where contracts require net payments.
Transfer pricing: Set markups consistent with comparables or simplified regimes for low value-adding services. Keep working papers to avoid retroactive adjustments that break your EBITDA-to-cash bridge.
Sponsor fee waivers: If fee waivers exist, confirm any unwinding and tax effects before close.

Regulatory and compliance

Credit agreements: Test restricted payment baskets and consent rights for upstream fees and new intercompany agreements. TSA or cost-sharing may require lender notice or consent.
Preparing to list: If the company becomes public, add recurring costs for controls, audit, and investor relations.
Related-party disclosure: Executed agreements and clean audit trails reduce the risk of adjustments that undermine modeled EBITDA.

Risks, pitfalls, and kill tests

Common risks: Avoid double counting synergies, underestimating stranded costs, systems delays that extend TSA, tax disallowance from weak evidence, and covenant strain where definitions disallow adjustments.
Kill tests: Ask if 90 percent of run rate ties to contracts, invoices, payroll, and allocation policies by entity and function. Confirm TSA and intercompany drafts have pricing and exit dates, covenant EBITDA reconciles to the credit agreement, tax has signed off on markups and indirect tax, and accounting policy memos reflect IFRS 3, ASC 805, and ASC 835-30 or IFRS 9.

Implementation timeline and owners

Pre-sign: Build the fee and central cost inventory and the initial normalization. Obtain a TSA term sheet. Draft the intercompany service model and allocation drivers. Tax scopes transfer pricing and indirect tax risks.
Sign to close: Finalize TSA and intercompany agreements. Paper fee terminations. Lock pricing and markups. Configure ERP cost centers and allocation logic. Prepare accounting policy memos for acquisition costs, debt issuance costs, and intercompany charges.
Day 1 to 100: Activate TSA and shared services. Begin monthly recharges and KPI reporting. Track TSA exit milestones and realized cost moves versus model. Deliver the lender package with covenant EBITDA, a sources-and-uses check, and supporting evidence. If needed, refresh the cash sweep logic to reflect new intercompany flows.
100 to 365: Exit TSA by workstream, complete system migrations, tune allocation keys as consumption stabilizes, and finalize transfer pricing documentation and local files.

Practical alternatives

No shared services: Extend TSA or use third-party outsourcing. Outsourcing can move faster but may raise unit costs early.
Cross-border constraints: Build more locally and keep central oversight lean. Savings arrive slower but compliance risk falls.
Tight covenants: Prioritize cash opex reductions that count under definitions over adjustments that may not.

A practical edge: a fee stack waterfall and 13-week cash proof

Two simple tools keep surprises down. First, build a fee stack waterfall that shows each service line, allocation driver, markup, and post-close change with links to contracts. Then time-phase it by TSA workstream and system go-lives. Second, run a 13-week cash proof that traces who pays and when, including VAT timing, withholding, and intercompany settlements. Together they close the loop between Adjusted EBITDA, covenant EBITDA, and actual cash paid. If your model uses sources and uses and post-close funding, verify that flows reconcile to your sources and uses and debt service.

Action checklist

Freeze scope: Lock ongoing versus one-off fees with contract support and board approvals.
Build drivers: Produce a driver-based central cost model with service catalog, allocation keys, markups, FX, and TSA timing.
Write policies: Draft accounting memos for acquisition costs, debt issuance costs, and intercompany charges under the applicable framework.
Bridge covenants: Build a covenant EBITDA bridge separate from GAAP and map to IFRS 18 presentation.
Run sensitivities: Stress TSA duration, FX, vendor pricing, and VAT recoverability. Set decision thresholds for signing and closing.

Closeout

Archive model artifacts and evidence such as indexes, versions, approvals, covenant calculations, user access, and audit logs. Hash the final package, set retention, and schedule vendor deletion with a destruction certificate where applicable. Apply legal holds that supersede deletion.