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.
| Typical business purchase cost | What it covers |
|---|---|
| Corporate finance fees | Transaction support, negotiation and deal management |
| Legal fees on a business purchase | Sale and purchase agreement, disclosure, warranties and completion |
| Due diligence fees | Financial, commercial and operational review |
| Accountancy fees | Financial analysis and transaction support |
| Tax advice | Structuring and tax implications of the acquisition |
| IFA / pension specialist fees | Personal investment or pension-related advice where required |
| Funding arrangement fees | Costs charged by lenders for arranging acquisition finance |
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.
There are several types of fee that may arise during a business purchase.
These can include:
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.
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 exact structure will depend on the lender and transaction, and buyers should confirm which costs a funder is prepared to finance.
A simplified transaction might look as follows:
| Sources | £ |
|---|---|
| Private capital from the buyer | 100,000 |
| Capital from funder | 600,000 |
| Total sources | 700,000 |
| Applications | |
| Transaction costs | (120,000) |
| Day-one payment to sellers | (500,000) |
| Remaining working capital | 80,000 |
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.
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:
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.
Corporate finance advisers can support the buyer throughout the acquisition process.
Their work may include:
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.
Some buyers engage advisers specifically to identify suitable acquisition opportunities.
This is sometimes referred to as deal origination.
Origination work can involve:
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.
Due diligence allows the buyer to investigate the business before completing the acquisition.
Financial due diligence may examine areas such as:
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.
Accountancy support may be required alongside formal due diligence.
This could include:
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.
Tax advice can be important when determining how the acquisition should be structured.
Areas requiring specialist advice might include:
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.
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.
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:
Buyers should therefore look beyond the headline interest rate when assessing the overall cost of acquisition finance.
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.
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.
In some cases, yes.
Buyers should ask advisers to provide:
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.
Yes.
Professional fees should be included in the acquisition model from the beginning.
The budget should consider:
This gives a much more realistic picture of the total amount of capital required.
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.