We are often asked what makes a deal successful? We decided to share our thoughts and experiences to help buyers and sellers have a more successful deal making process.
This blog is for informational purposes only. This blog is not legal advice, and no attorney – client relationship is intended or formed by this blog. For more information or to contact an attorney at Foreman Law, please email info@goforemanlaw.com.
How much will your deal cost?
Every deal is different. Below is some general advice that will help you plan for the cost of your deal.
General principles
The following factors tend to impact the cost of the deal:
Cost Drivers:
- Complexity of the deal – Think about how many key terms there are on the deal, and how many deals are actually happening with this one deal. For example, a single deal could have a real estate transaction, a side deal with a key executive, a financing deal, and the core asset purchase transaction, among other things. Complexity isn’t always related to the size of the deal. Some strategic deals can be $0 of purchase price and still very complex. Generally, the more complex the more costly.
- Size of the deal – In general, the larger the deal the more it will cost to get done, there are usually more pieces to understand, and those pieces are more important.
- Time pressure – The more compressed the timeline is the more you will need to work on multiple components of the deal at once. When working on multiple parts of the deal at once, the most cost-effective path can still be very expensive because you can’t wait on some parts of the work without jeopardizing the deal. However, sometimes time pressure can create the hard deadlines that keep things moving, which can help keep budget down.
- Relational dynamics – Relationships can blow a budget faster than anything else. If relationships aren’t working well, everything can take a lot more time and therefore cost more.
- Key issues – The number of key issues in your deal (such as working through a key deal term that the parties don’t agree on, or getting consent from a difficult third party) can increase the cost of the deal.
- Scope of work – Controlling what parts of the deal your team works on can drive the cost up or down. Be clear with your team on scope of work from the beginning.
Soft Costs
These won’t show up on the balance sheet, but can definitely affect the true cost of the deal.
- Time with family, other activities, etc. – Safeguard some time for your family and activities.
- Your time – Make your time a priority and delegate to save your time.
- Employee’s time – Understand how much of your employee’s time will be going into the sale process rather than daily business.
- Opportunity cost – Remember you will be giving up other opportunities to take on this deal.
Hard Costs
Both parties
- Legal – Often 1-2% range of total purchase price. But that can vary based on all the factors above. As you talk to your attorney, make sure you ask what things will be cost drivers so they can give you the best estimate and you can plan appropriately.
- Accounting- can be a similar range of 1-2% of deal price depending on how much financial due diligence is involved. Sometimes can be quite a bit less than that depending on the deal and scope of work. On larger or more involved transactions, it can be more expensive than legal costs.
- Third party consents- Some third party consents require payment of a fee.
- Taxes on transaction – This could include sales or other transfer taxes in addition to the income tax impact of the transaction.
- Other service providers – There may be subject matter expert or consultant on your deal. Their fees will vary based on the engagement.
- Post-closing costs – Make sure your professional team is paying attention to this for you and prepares you for any expected additional costs post-closing.
Seller Specific Hard Costs
- Investment banker, business broker – Depending on the size of the deal, these fees can be up to 10% of the purchase price. Larger deals will typically run quite a bit less. These providers are an incredible part of the process and create a great deal of value in the process. Finding a good provider in this space if you need to find a buyer is well worth the money.
- Debt payoff – In addition to the outstanding principal and interest, be aware of any pre-payment penalties.
- Continuity or retention bonuses – The value of the business is often in the people and retention or continuity bonuses can be a good way to get key employees to stick around.
Buyer Specific Hard Costs
- Purchase price or down payment – Depending on how the buyer is financing the deal, they may have to come up with the full purchase price at closing, or simply some form of down payment with their lender.
Today’s Takeaway
Jacob – The hard costs go way beyond the purchase price. Plan for up to 5% of the deal to be hard costs.
Sam – Remember the value of your time! Pay other people for their expertise so you can earn the highest return on your time.
Wellness Tip!
Understand you only have 24 hours in a day, make sure you put your top priorities first!