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Overview of Costs in M&A and How to Reduce Them

Kison Patel
CEO and Founder of DealRoom
Kison Patel
CEO and Founder of DealRoom

One-off costs are regularly overlooked in the M&A process. The fact that many M&A guides refer to all-encompassing ‘M&A pre-transaction costs’ and ‘M&A post-transaction costs’ is a testament to this.

Value creation in M&A is as much about cost reduction as income generation. So it’s highly important for anyone entering a transaction to have a good handle on costs before they arise, to ensure that you can minimize them when they do. 

Clearly, the extent to which each of the following M&A fees will impact your deal depends on the nature of the deal, but it’s reasonable to expect nearly all, if not all, of them to arrive at some stage of any business acquisition.

When planning your next transaction, be sure to make a rough estimate about each one as you go.

By doing so, you’re effectively undertaking a cost-benefit analysis of the deal, allowing you to see whether it will generate value or not. Below we provide a comprehensive overview of traditional merger and acquisition costs. 

An Quick Overview of Typical M&A Costs

  1. M&A Advisor Fees: There are typically two components: A retainer fee and a sales commission fee. The retainer fee is usually a few thousand dollars a month, while the commission fee can be anywhere between 2% and 10% of the fee agreed (see details below).
  2. Deal-related costs: This cost will vary to a great extent on the complexity of the deal - travel costs required, interpreters, intellectual property valuation, industry experts, etc. - but budget for $25K for most low middle market deals.
  3. Legal fees: Even with a talented legal counsel, the paperwork can add up quickly during the M&A process. The number of hours needed to process everything is considerable. Budget around $100K at the low end and up to $250K, depending on the size of the deal.
  4. Breakage fees: As outlined below, breakage fees can typically take between 5% and 10% of the total deal value. Good negotiation should allow you to see this figure reduced, but some costs here are inevitable.
  5. Integration advisory fees: Integration advisory typically costs between 2% and 6% of the deal value. Do not attempt to undertake integration advisory without outside help if you’ve never completed an integration before.
  6. IT & Technology costs: Assuming that you will need an IT system integration with the acquired firm, and this will include materials, software licences, installations, and more, we believe you should budget for at least $100K here.
  7. HR costs: The big costs here are in terms of redundancies of the people you’ve identified as being surplus to requirements at the due diligence phase. As redundancy costs are one to two weeks of every year served, this then becomes a relatively simple task of multiplication.
  8. Debt servicing: Debt servicing is one of the easier costs to budget for - with the total outlay being a product of the interest rate and capital provided by the lender.
  9. Rebranding costs: Small companies can spend between $100-$200K on a good quality rebranding. The bigger your company, the bigger the cost. Budget for approximately 5% of revenue.

1. M&A Advisor Fees

If you’ve already identified a business that you want to acquire, it may be that you don’t even need to avail of the services of an intermediary.

Bankers typically charge a retainer fee, which will be a few thousand dollars per month at the lower end. Then, there’s the commission, which is typically an additional five percent of the total fees paid on the buyer side.

You can already see why these fees attract so much attention.

How to reduce costs:

The best policy is to assess what value a banker can bring to your deal and whether that warrants the extra cost. 

On a more granular level you might still be wondering “so how much do M&A advisors really cost?” Retainers will often be about $50,000-$200,000. On top of these retainers companies need to be prepared for success fees which are dependent upon the deal size. The larger the deal, the smaller the percentage changed.

For instance, if a deal is less than $5 million the percentage typically ranges from 10-12%. On the other hand, if the deal is quite larger, say upwards of $25 million the percentage is about 2-4%.

M&A advisory fees

2. Deal-Related Costs

When we refer to deal-related costs, we’re talking about the miscellaneous costs that tend to stack up by virtue of looking to acquire a business. As is always the case with M&A costs, the more complex the transaction, the higher the costs are likely to be.

Let’s suppose you’re acquiring a firm in a different city. That means travel expenses for you and a few members of your management team. It will mean wining and dining for the owners of the firm being acquired. You’ll pay for data room software that can be used during the process.

How to reduce costs:

Reducing these costs is a matter of deciding what’s absolutely necessary (wining and dining and what’s not (a five-star hotel for your team) and accounting for the expenses accordingly.

3. Legal Fees

Most of the costs listed here can be reduced with some planning, and nowhere is that more true than legal fees. Ultimately, your legal team’s job is to advise on corporate matters, one of which is business acquisitions.

How to reduce costs:

Reducing legal fees for mergers and acquisitions thus comes down to keeping as many of the legal functions in-house as possible. 

4. Breakage Fees

Breakage fees refer to the costs incurred when a deal which has reached an advanced stage falls through. This is usually composed of a deposit requested by the selling firm based on the total selling price.

These costs can amount to between 5% and 10% of the purchase price, which will risk becoming a huge unnecessary cost in the unlikely event of the deal falling through.

How to reduce costs:

One way to reduce this, and show the seller that your approach is in good faith, is to compensate them for the disruption caused by due diligence (for example, paying for management and legal counsel to take days out of their routine).

While this is an added expense, it will be significantly less than the cost of an unreturned deposit. 

financial due diligence template

5. Integration Advisory Fees

Acquisition integration may seem like a cost that can easily be avoided, but in fact most practitioners say that it’s the most important part of the process and not to be scrimped on.

While the entire process will include some of the aspects which follow below, if you’ve never undertaken the process before, it may be worthwhile bringing in some experienced consultants to advise which steps you’ll need to take in the 12 to 24 months after closing.

How to reduce costs:

The best way to reduce M&A costs here is to begin thinking about integration as soon as due diligence begins. Understanding which aspects will be difficult to integrate as soon as possible reduces the chances that you’ll need to bring in consultants to advise on the process. 

6. IT and Technology Costs

From something which is only partly relevant to an acquisition a decade ago, technology is now a central component of most deals. And this means that it will cost. Involve your IT team in the process from the outset and ask permission from the seller to provide them with access to the sellers’ IT systems.

There are usually unavoidable IT costs in business transactions (purchasing extra subscriptions on existing IT systems, integrating data collection, etc.) but what emerges from feedback from most deals is that time is key to reducing costs. That is, even after many functions have been integrated, IT is often left till last.

How to reduce costs:

It’s one of the most uncomfortable changes in an acquisition. As a rule, people don’t like moving from a system they’re familiar with to one they’ve never used before. But to avoid costs in this area, make the necessary changes quickly. 

m&a platform

7. HR Costs

Where HR is concerned in business acquisitions, it’s not the costs that you see which will destroy value, but the costs that you don’t see. That is to say - ensure the buy-in of the best people. This has been repeated so many times by M&A guides that it’s almost a mantra.

The visible costs are those like training costs, salary increases, pensions liabilities and redundancies. The invisible costs are the unnecessary hiring and firing costs that arise by not selecting the right people in the first place.

How to reduce costs:

Getting these wrong will also reduce revenue, making it a double-edged sword. Meeting as many people as possible in the selling company, and obtaining resumes of everyone is a good way to begin to establish which will form part of your team.

Ask your own team to make their evaluations as well, allowing you to generate some costs now to avoid even larger ones down the road, which has you generate some M&A expenses now in an effort to avoid even larger ones down the road.

8. Debt Servicing

Assuming that your business acquisition involves some debt, you’ll have to service debt for a few years.

How to reduce costs:

The best way to reduce this cost is to check a number of financial and non-financial institutions well in advance of approaching an acquisition target, to see what kind of terms might be available. The last thing you want is to scramble for financing with your own bank when the seller has agreed terms. Shopping around for credit will allow you to check which firms are offering the lowest credit and the least restrictive covenants on the debt.

9. Rebranding Costs

Unless you’re thinking of creating a group of companies, there’ll be a rebrand of the acquired firm or in some cases, a rebrand for both. The latter will inevitably be more expensive than the former, but that’s not to say that one is a better move than the other. This really depends on a number of factors outside the scope of this article.

How to reduce costs:

Saving money here really comes down to common sense. Don’t ask a branding agency if you should rebrand as they’ll always answer ‘yes’ and don’t try to fix something that’s not broken - to some extent, your brand got you to where you are now, so don’t throw away all that brand equity without a very good reason.

Conclusion

Whether you are doing a deal valued at 5 million, or 5 billion, additional deal costs will inevitably occur.

However, being aware of potential cost areas can help teams better plan for them. Always remember, it’s important to make cost estimates for the various categories that apply to your specific deal.

guide to dealroom


One-off costs are regularly overlooked in the M&A process. The fact that many M&A guides refer to all-encompassing ‘M&A pre-transaction costs’ and ‘M&A post-transaction costs’ is a testament to this.

Value creation in M&A is as much about cost reduction as income generation. So it’s highly important for anyone entering a transaction to have a good handle on costs before they arise, to ensure that you can minimize them when they do. 

Clearly, the extent to which each of the following M&A fees will impact your deal depends on the nature of the deal, but it’s reasonable to expect nearly all, if not all, of them to arrive at some stage of any business acquisition.

When planning your next transaction, be sure to make a rough estimate about each one as you go.

By doing so, you’re effectively undertaking a cost-benefit analysis of the deal, allowing you to see whether it will generate value or not. Below we provide a comprehensive overview of traditional merger and acquisition costs. 

An Quick Overview of Typical M&A Costs

  1. M&A Advisor Fees: There are typically two components: A retainer fee and a sales commission fee. The retainer fee is usually a few thousand dollars a month, while the commission fee can be anywhere between 2% and 10% of the fee agreed (see details below).
  2. Deal-related costs: This cost will vary to a great extent on the complexity of the deal - travel costs required, interpreters, intellectual property valuation, industry experts, etc. - but budget for $25K for most low middle market deals.
  3. Legal fees: Even with a talented legal counsel, the paperwork can add up quickly during the M&A process. The number of hours needed to process everything is considerable. Budget around $100K at the low end and up to $250K, depending on the size of the deal.
  4. Breakage fees: As outlined below, breakage fees can typically take between 5% and 10% of the total deal value. Good negotiation should allow you to see this figure reduced, but some costs here are inevitable.
  5. Integration advisory fees: Integration advisory typically costs between 2% and 6% of the deal value. Do not attempt to undertake integration advisory without outside help if you’ve never completed an integration before.
  6. IT & Technology costs: Assuming that you will need an IT system integration with the acquired firm, and this will include materials, software licences, installations, and more, we believe you should budget for at least $100K here.
  7. HR costs: The big costs here are in terms of redundancies of the people you’ve identified as being surplus to requirements at the due diligence phase. As redundancy costs are one to two weeks of every year served, this then becomes a relatively simple task of multiplication.
  8. Debt servicing: Debt servicing is one of the easier costs to budget for - with the total outlay being a product of the interest rate and capital provided by the lender.
  9. Rebranding costs: Small companies can spend between $100-$200K on a good quality rebranding. The bigger your company, the bigger the cost. Budget for approximately 5% of revenue.

1. M&A Advisor Fees

If you’ve already identified a business that you want to acquire, it may be that you don’t even need to avail of the services of an intermediary.

Bankers typically charge a retainer fee, which will be a few thousand dollars per month at the lower end. Then, there’s the commission, which is typically an additional five percent of the total fees paid on the buyer side.

You can already see why these fees attract so much attention.

How to reduce costs:

The best policy is to assess what value a banker can bring to your deal and whether that warrants the extra cost. 

On a more granular level you might still be wondering “so how much do M&A advisors really cost?” Retainers will often be about $50,000-$200,000. On top of these retainers companies need to be prepared for success fees which are dependent upon the deal size. The larger the deal, the smaller the percentage changed.

For instance, if a deal is less than $5 million the percentage typically ranges from 10-12%. On the other hand, if the deal is quite larger, say upwards of $25 million the percentage is about 2-4%.

M&A advisory fees

2. Deal-Related Costs

When we refer to deal-related costs, we’re talking about the miscellaneous costs that tend to stack up by virtue of looking to acquire a business. As is always the case with M&A costs, the more complex the transaction, the higher the costs are likely to be.

Let’s suppose you’re acquiring a firm in a different city. That means travel expenses for you and a few members of your management team. It will mean wining and dining for the owners of the firm being acquired. You’ll pay for data room software that can be used during the process.

How to reduce costs:

Reducing these costs is a matter of deciding what’s absolutely necessary (wining and dining and what’s not (a five-star hotel for your team) and accounting for the expenses accordingly.

3. Legal Fees

Most of the costs listed here can be reduced with some planning, and nowhere is that more true than legal fees. Ultimately, your legal team’s job is to advise on corporate matters, one of which is business acquisitions.

How to reduce costs:

Reducing legal fees for mergers and acquisitions thus comes down to keeping as many of the legal functions in-house as possible. 

4. Breakage Fees

Breakage fees refer to the costs incurred when a deal which has reached an advanced stage falls through. This is usually composed of a deposit requested by the selling firm based on the total selling price.

These costs can amount to between 5% and 10% of the purchase price, which will risk becoming a huge unnecessary cost in the unlikely event of the deal falling through.

How to reduce costs:

One way to reduce this, and show the seller that your approach is in good faith, is to compensate them for the disruption caused by due diligence (for example, paying for management and legal counsel to take days out of their routine).

While this is an added expense, it will be significantly less than the cost of an unreturned deposit. 

financial due diligence template

5. Integration Advisory Fees

Acquisition integration may seem like a cost that can easily be avoided, but in fact most practitioners say that it’s the most important part of the process and not to be scrimped on.

While the entire process will include some of the aspects which follow below, if you’ve never undertaken the process before, it may be worthwhile bringing in some experienced consultants to advise which steps you’ll need to take in the 12 to 24 months after closing.

How to reduce costs:

The best way to reduce M&A costs here is to begin thinking about integration as soon as due diligence begins. Understanding which aspects will be difficult to integrate as soon as possible reduces the chances that you’ll need to bring in consultants to advise on the process. 

6. IT and Technology Costs

From something which is only partly relevant to an acquisition a decade ago, technology is now a central component of most deals. And this means that it will cost. Involve your IT team in the process from the outset and ask permission from the seller to provide them with access to the sellers’ IT systems.

There are usually unavoidable IT costs in business transactions (purchasing extra subscriptions on existing IT systems, integrating data collection, etc.) but what emerges from feedback from most deals is that time is key to reducing costs. That is, even after many functions have been integrated, IT is often left till last.

How to reduce costs:

It’s one of the most uncomfortable changes in an acquisition. As a rule, people don’t like moving from a system they’re familiar with to one they’ve never used before. But to avoid costs in this area, make the necessary changes quickly. 

m&a platform

7. HR Costs

Where HR is concerned in business acquisitions, it’s not the costs that you see which will destroy value, but the costs that you don’t see. That is to say - ensure the buy-in of the best people. This has been repeated so many times by M&A guides that it’s almost a mantra.

The visible costs are those like training costs, salary increases, pensions liabilities and redundancies. The invisible costs are the unnecessary hiring and firing costs that arise by not selecting the right people in the first place.

How to reduce costs:

Getting these wrong will also reduce revenue, making it a double-edged sword. Meeting as many people as possible in the selling company, and obtaining resumes of everyone is a good way to begin to establish which will form part of your team.

Ask your own team to make their evaluations as well, allowing you to generate some costs now to avoid even larger ones down the road, which has you generate some M&A expenses now in an effort to avoid even larger ones down the road.

8. Debt Servicing

Assuming that your business acquisition involves some debt, you’ll have to service debt for a few years.

How to reduce costs:

The best way to reduce this cost is to check a number of financial and non-financial institutions well in advance of approaching an acquisition target, to see what kind of terms might be available. The last thing you want is to scramble for financing with your own bank when the seller has agreed terms. Shopping around for credit will allow you to check which firms are offering the lowest credit and the least restrictive covenants on the debt.

9. Rebranding Costs

Unless you’re thinking of creating a group of companies, there’ll be a rebrand of the acquired firm or in some cases, a rebrand for both. The latter will inevitably be more expensive than the former, but that’s not to say that one is a better move than the other. This really depends on a number of factors outside the scope of this article.

How to reduce costs:

Saving money here really comes down to common sense. Don’t ask a branding agency if you should rebrand as they’ll always answer ‘yes’ and don’t try to fix something that’s not broken - to some extent, your brand got you to where you are now, so don’t throw away all that brand equity without a very good reason.

Conclusion

Whether you are doing a deal valued at 5 million, or 5 billion, additional deal costs will inevitably occur.

However, being aware of potential cost areas can help teams better plan for them. Always remember, it’s important to make cost estimates for the various categories that apply to your specific deal.

guide to dealroom


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