What fees are payable on a business purchase?

The cost of buying a business extends beyond the purchase price itself. Buyers may need to budget for corporate finance advice, legal fees, due diligence, accountancy, tax advice, pension or IFA advice and funding arrangement fees. Depending on the size and complexity of the transaction, total professional and transaction costs can be significant and should be included in the overall funding requirement.

The purchase price is only one part of the total cost of buying a business.

A buyer should also allow for the professional fees, due diligence costs and funding charges required to assess, structure and complete the transaction.

These costs can vary significantly depending on the value and complexity of the acquisition, the advisers involved and the level of external finance required.

Understanding the likely fees at an early stage can help ensure the buyer has sufficient capital available to complete the transaction and maintain appropriate working capital afterwards.

What fees are payable when buying a business?

There are several types of fee that may arise during a business purchase.

These can include:

• Corporate finance fees
• Legal fees
• Financial due diligence
• Accountancy fees
• Tax advice
• IFA or pension specialist advice
• Funding arrangement fees
• Deal origination fees, where applicable

Not every transaction will require every type of adviser, but buyers should avoid budgeting solely for the headline purchase price.

Professional costs can become a material part of the overall funding requirement.

Are transaction fees included in the funding for a business purchase?

In many transactions, professional fees and acquisition costs are incorporated into the overall sources and applications of funds for the deal.

This means the buyer may not necessarily pay every professional fee separately from personal savings before completion.

Instead, the buyer's personal capital and any external funding are combined to create the total pool of capital available for the transaction.

That capital is then applied towards:

• The amount payable to the seller on completion
• Transaction and advisory costs
• Funding fees
• Other completion-related liabilities
• Any working capital retained within the business

The exact structure will depend on the lender and transaction, and buyers should confirm which costs a funder is prepared to finance.

Example sources and applications statement

A simplified transaction might look as follows:

A sources and applications statement helps show where the money required for the acquisition is coming from and how it will be used.

This is important because the buyer needs to fund more than simply the amount being paid to the seller.

What are legal fees on a business purchase?

Legal fees on a business purchase can represent one of the more significant professional costs involved in completing an acquisition.

The buyer's solicitor may be responsible for matters such as:

• Reviewing and negotiating the Share Purchase Agreement or Asset Purchase Agreement
• Reviewing warranties and indemnities
• Assessing disclosure documents
• Reviewing property or lease arrangements
• Advising on employment-related matters
• Reviewing customer and supplier contracts
• Supporting the due diligence process
• Negotiating restrictive covenants
• Reviewing funding and security documents
• Managing legal completion

The level of legal fees will depend on the complexity of the transaction.

A relatively straightforward acquisition will generally require less legal work than a transaction involving multiple shareholders, complex funding, property, intellectual property or significant contractual issues.

As a broad guide, legal fees on a business purchase might sometimes fall in the region of £15,000 to £25,000, although costs can be lower or substantially higher depending on the circumstances.

Buyers should obtain a detailed fee estimate from their solicitor at the outset and understand what is included within it.

What are corporate finance fees when buying a business?

Corporate finance advisers can support the buyer throughout the acquisition process.

Their work may include:

• Assessing acquisition opportunities
• Reviewing valuation
• Negotiating Heads of Terms
• Structuring the transaction
• Supporting funding discussions
• Coordinating due diligence
• Liaising with advisers
• Negotiating commercial terms
• Managing the transaction through to completion

Fees may be structured as a fixed amount, a percentage of the transaction value or a combination of an upfront fee and a completion or success fee.

Depending on the mandate and transaction, corporate finance fees could represent approximately 3% to 5% of the transaction value, although arrangements vary considerably.

What are deal origination fees?

Some buyers engage advisers specifically to identify suitable acquisition opportunities.

This is sometimes referred to as deal origination.

Origination work can involve:

• Defining acquisition criteria
• Researching target companies
• Identifying potential sellers
• Approaching business owners
• Qualifying acquisition opportunities
• Arranging initial discussions

Fees may be charged as a fixed amount, a monthly retainer, a percentage of the transaction or a combination of these.

Buyers should understand whether origination fees are separate from wider corporate finance transaction fees.

How much does due diligence cost when buying a business?

Due diligence allows the buyer to investigate the business before completing the acquisition.

Financial due diligence may examine areas such as:

• Historic profitability
• Quality of earnings
• Working capital
• Cash flow
• Debt and liabilities
• Customer concentration
• Revenue trends
• Forecast assumptions

Other forms of due diligence may cover commercial, legal, tax, operational, HR or IT matters.

For an SME transaction, financial due diligence might cost approximately £10,000 to £20,000, although the actual cost will depend heavily on the size and complexity of the business and the scope of the review.

Trying to reduce costs by limiting due diligence too aggressively can create significantly greater risk later.

What accountancy fees are involved in buying a business?

Accountancy support may be required alongside formal due diligence.

This could include:

• Reviewing historic accounts
• Assessing adjusted EBITDA
• Evaluating working capital
• Preparing or reviewing financial forecasts
• Supporting transaction modelling
• Considering completion accounts

Depending on the work involved, accountancy fees could potentially be in the region of £3,000 to £5,000 for a relatively straightforward assignment.

More complex transactions may require significantly more work.

How much does tax advice cost on a business purchase?

Tax advice can be important when determining how the acquisition should be structured.

Areas requiring specialist advice might include:

• Share purchase versus asset purchase
• Tax treatment of acquisition finance
• Capital allowances
• Employment-related taxes
• VAT
• Stamp taxes
• Group structures
• Future extraction of profits
• Tax implications for management investors

Tax advisory fees might sometimes fall in the region of £2,000 to £5,000 for a limited scope of work, although complex transactions may cost substantially more.

The tax consequences of a transaction should normally be considered before the structure is finalised rather than after terms have already been agreed.

Are IFA or pension specialist fees required?

Not every business purchase will require an Independent Financial Adviser or pension specialist.

However, specialist advice may be required where personal pensions, SSAS arrangements or other investments form part of the buyer's funding strategy.

Fees will usually be bespoke and will depend on the complexity of the advice required.

Where pension funds are being considered, appropriate regulated and tax advice should be obtained before taking any action.

What are funding arrangement fees?

Lenders may charge an arrangement fee for providing acquisition finance.

This is often calculated as a percentage of the amount being borrowed.

A funding arrangement fee might typically be somewhere around 0.5% to 1.5% of the finance arranged, although this varies between lenders and facilities.

Other funding costs may also include:

• Legal fees
• Valuation fees
• Monitoring fees
• Commitment fees
• Security registration costs
• Broker or adviser fees

Buyers should therefore look beyond the headline interest rate when assessing the overall cost of acquisition finance.

How much should I budget for business purchase fees?

The total cost will depend heavily on the size and complexity of the transaction.

For some SME acquisitions, the combined costs of corporate finance advice, legal support, due diligence, accountancy, tax advice and funding fees could potentially reach £100,000 to £150,000 or more.

A buyer considering a more complex transaction may therefore choose to budget conservatively and allow a larger contingency.

For example, a total professional and transaction cost budget of approximately £200,000 may provide additional headroom where the final scope of work is not yet known.

However, this should not be treated as a standard cost for every acquisition.

The appropriate budget should be built from actual adviser quotations and the specific requirements of the transaction.

Why can fees be proportionately higher on smaller business purchases?

Professional advisers still need to carry out many of the same core tasks regardless of whether a company is being acquired for £500,000 or several million pounds.

Legal documentation still needs to be negotiated.

Due diligence still needs to be completed.

Funding still needs to be assessed.

This means professional costs do not necessarily reduce in direct proportion to the value of the company.

As a result, transaction fees can represent a relatively high percentage of the purchase price on smaller deals.

This should be considered carefully when assessing whether a particular acquisition remains financially attractive.

Can business purchase fees be negotiated?

In some cases, yes.

Buyers should ask advisers to provide:

• A clear scope of work
• An estimated fee range
• Details of hourly rates where applicable
• Any fixed-fee elements
• Success or completion fees
• Additional costs that may arise
• Circumstances in which the estimate could increase

The cheapest adviser is not necessarily the best option.

However, understanding exactly what each adviser is providing makes it easier to compare proposals and control transaction costs.

Should I include business purchase fees in my acquisition budget?

Yes.

Professional fees should be included in the acquisition model from the beginning.

The budget should consider:

• Purchase consideration
• Legal fees on the business purchase
• Corporate finance fees
• Due diligence
• Accountancy and tax costs
• Funding arrangement fees
• Other specialist advice
• Working capital
• Post-acquisition investment
• A contingency for unexpected costs

This gives a much more realistic picture of the total amount of capital required.

How Valius can help

Whether you are considering buying, selling or planning the next stage of your business journey, having experienced support around you can make the process clearer and more manageable.

Valius works with business owners and management teams to understand their objectives, assess their options and navigate important strategic and financial decisions. If you would like to discuss your plans and explore the support available, contact the Valius team for an initial conversation.