Mergers and acquisitions have the potential to fuel long-term growth, but they also come at a cost. While every M&A transaction is different, there are a variety of common fees that you might incur before, during, and after the deal. In this article, we’ll go over some of the most common types of fees to expect, so you can better plan for your next M&A transaction.
1. Advisory fees
Getting help from an experienced third party can be tremendously valuable during an M&A deal—but it comes at a cost. Advisory fees will vary depending on whether you’re working with an M&A advisor, a business broker, or an investment banker. (If you’re not sure of which one to use, we’ve written a previous article about the difference between M&A advisors and business brokers.)
There are two main types of M&A advisory fees: retainers and “success fees” (i.e. commissions):
A retainer is a flat fee that is charged either as a single payment or on a monthly basis. Monthly retainer fees typically start at several thousand dollars.
A success fee is a percentage-based fee that is charged once the deal is successfully completed. This fee may be calculated using sliding scales such as the Lehman Formula: 5 percent for the first $1 million, 4 percent for the second $1 million, 3 percent for the third $1 million, 2 percent for the fourth $1 million, and 1 percent on everything above $4 million.
2. Legal fees
Not only will you be paying M&A advisory fees, you’ll also need to enlist the help of a law firm if you don’t have an in-house legal team. The cost of legal fees during an M&A deal will depend on the duration and scope of their work for you, so reach out to multiple firms to compare quotes. Valuable IP assets and complicated tax requirements are two examples of issues that could result in higher legal fees during M&A transactions.
3. Travel expenses
M&A transactions can take place between any two businesses anywhere in the world. This opens up a wide range of possibilities—but it also means that you might pay travel expenses for larger M&A deals that benefit from in-person negotiations.
According to the IRS, travel expenses may include:
Round-trip travel by air, train, bus, or car to the business destination
Lodging and meals
Taxis, car rentals, and public transportation between the airport or train station, your lodging, and your place of work
Dry cleaning and laundry
4. Technology costs
IT and technology is an overlooked M&A cost both during and after the transaction. According to James Anderson, senior research director at Gartner: “IT won't make the deal but it can break the deal. Leaders will factor IT costs into the decision to acquire or not.”
Virtual data rooms (VDRs) are one of the most important M&A technologies, and are widely used in M&A deals. A VDR is an online repository for storing and sharing confidential and sensitive files with third parties. Security features of a VDR include watermarking, user authentication, and logging and monitoring to ensure that documents are kept safely under lock and key. The good news is that VDR pricing can be quite affordable, depending on your needs.
Once the deal is signed, you’ll also likely spend some time and money integrating the two organizations’ technology stacks. This may also include getting rid of antiquated legacy systems or taking advantage of this fresh start to launch a joint modernization effort.
5. Integration expenses
IT and technology integration is just one cost involved when integrating two different organizations. Compatibility issues between the two businesses are one of the most common M&A mistakes, so make sure that you’re prepared for the costs of integration.
After an M&A deal, at least one of the businesses (and in some cases, both) needs to undergo a rebranding. Workflows, workforces, and assets also need to be seamlessly combined. Ernst & Young estimates that M&A integration costs range from 1 to 7 percent of the deal’s total value.