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Written By Matt Perkins

Published February 4, 2025

Updated February 4, 2025

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Overview of Costs in M&A

 

Mergers and acquisitions (M&As) play a critical role in the health of the economy. In an M&A transaction, entire companies, including their major business assets, get consolidated through these financial transactions. That can include purchasing another company, acquiring some or all its major assets, or making a tender offer for its stocks.

A merger is the combination of two firms to establish a new legal entity under one corporate name and the acquisition of that business. There are plenty of ways to finance an M&A, including debt, cash, and stocks, or a combination of all three.

But if you’re the buyer in an M&A transaction, are you certain you’re budgeting enough to cover the costs? In today’s volatile market for investment, that’s an important consideration.

What you need as you embark on your M&A is a strategic growth plan.  

So, how much does M&A cost?

 

How Are M&A Deals Priced?

M&A costs can vary quite a bit. Factors that impact it can include:

  • How large the deal is
  • How complex the transaction is
  • The experience level of the financial advisor

M&A transactions typically include two types of fees. A retainer fee often costs several thousand dollars per month, while there is also a commission fee of 2-10% on average. One-time acquisition costs can be applied to the company’s employees, real estate, and technology. It’s sometimes common for negotiators to overlook those one-off costs during the M&A process.

That’s why if you’re entering one of these transactions, you want to understand the costs heading in and not get ambushed later in the negotiations.

No two M&A deals are alike, and exactly how these fees impact your deal depends on how it gets structured.  Start with an estimate of the cost of the transaction, similar to a cost-benefit analysis of the deal, to see how much value it is likely to generate. It’s particularly important to consider all deal-related costs, which vary based on the complexity of the transaction.  

Some expenses to consider include:

  • Legal fees, including the number of hours needed to manage all paperwork in the M&A process
  • Breakage fees, often between 5%-10% of the total deal value
  • Integration, which will likely cost between 2%-6% of the deal value
  • IT & Technology expenses if an IT system integration is needed
  • Debt serving
  • Human Resources
  • Rebranding the new, larger company,

 

How Much Does M&A Cost?

Transaction costs related to your M&A typically range from 1%-4% of the deal’s value. That may sound like a small percentage, but it can add up, and a lot of buyers are failing to budget enough for M&A transaction costs. In a volatile market for investing, those costs can add up fast.

One thing that can be a major driver of M&A integration costs is change. When the acquisition is made, change comes to several aspects of the business, including:

  • Technology
  • Workforce
  • Operating Model
  • Company Infrastructure

A larger deal may actually have fewer transaction costs since the acquisition of a direct competitor will lead to the integration of similar products and services or facilities, whereas smaller deals could mean a smaller and different company that requires a more extensive degree of integration.

M&A integration costs can also vary by sector. In the fields of health care and life sciences, for example, the median M&A integration cost can be significantly higher, as much as 10.3% of the target revenue. That’s mainly because the buyer will need to be certain that they are in compliance with federal regulatory, safety, and quality standards.

On the other hand, the energy and utility sectors have lower M&A integration costs, at around 3.9% of the target revenue. The fact that a lot of acquisitions happen within the sector contributes to these lower costs.

One-time M&A transaction costs are often cited as being driven by:

  • Severance pay
  • Additional costs related to employees
  • Office shutdowns
  • And integration of IT systems

M&A transactions are popular because successful businesses are eager to break into new markets through acquisitions, but doing that can require new talent, and employees who have the skills and knowledge in this new field that the acquiring company lacks. The cost of acquiring new talent can add to the transaction costs as well.

Cross-sector deals usually have a higher average integration cost compared to same-sector transactions.

 

Who Pays M&A Fees?

You should also plan for post-closing adjustments, which is another major M&A cost.

Considered a working capital adjustment, this occurs when the working capital provided by the seller at the deal’s closing doesn’t match the balance sheet the buyer had prepared. If the amount of working capital is lower than the original estimate, the seller is expected to refund the difference to the buyer.

In this part of the M&A process, it could mean lowering the purchase price to make up for the difference.

However, if the working capital comes in higher than the original estimates, the buyer must cover the cost for the remaining amount.

The most common form of price adjustment in an M&A deal is the Net Working Capital Purchase Price Adjustment (PPA).  PPA is included in most purchase agreements, designed to protect both sellers if the balance sheet of the acquired company fails to match the initial expectations of this merger and acquisition.

It’s an important part of the deal. The acquired company might not have the net assets they initially expected. The PPA occurs once the deal is closed, so either the buyer or seller can be compensated if there were not enough net assets that got transferred (the buyer is compensated) or if net assets turn out greater than what was required (the seller is compensated).

This can be one of the most confusing aspects of an M&A transaction. Having a trusted business broker or financial advisor at your side throughout the M&A process is a way to help understand the process, the need for the PPA, and why it’s essential for a fair deal structure for both buyers and sellers.

 

How Much Do M&A Advisors Charge?

For their services during an M&A deal, M&A advisors usually charge an upfront retainer fee. Depending on how complex the sale is, it can range from $5,000 to $50,000.

Other advisors charge a success fee that typically covers 2-8% of the deal size, and some advisors also charge a monthly retainer.

It’s also important to consider the services that advisors provide, which include:

  • Preparing material to market your business to prospective buyers
  • Tapping into their network to match qualified buyers and sellers
  • The due diligence process
  • The negotiating process
  • And the closing, including assistance in drafting the sell and purchase agreement

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