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3 Types of Costs Associated With Mergers and Acquisitions

When two businesses go through a merger and acquisition, there are a number of costs that can be associated with the process.

These costs can range from legal and accounting fees, to the cost of lost productivity as the two companies merge their operations.

By understanding these costs, you can be better prepared for what to expect when your business goes through this process.

In this blog, we discuss three types of costs that are often associated with mergers and acquisitions.

SME Capital - Acqusition Costs

1. Legal and Accounting Fees

The first type of cost is the legal and accounting fees.

Generally, these can be substantial, especially if there are any complex issues that need to be sorted out during the merger or acquisition process.

For example there could be instances where an accounting firm could charge up to £75,000 to advise a M&A transaction, and a law firm over £100k.

If there are any disputes that arise between the two companies during the transition, this would likely result in higher legal costs. 

However, although these M&A accounting and legal fees appear high, the cost of not having proper guidance could be a lot greater.

Fortunately, most of these costs can be reduced with some proper planning. It's your legal team’s job to advise on corporate matters, so try to keep as many of the legal functions in house as possible, if possible. 

2. Financial Costs

The second type of cost is the financial cost.

One of the most significant financial costs is the cost of due diligence.

Simply, this is the process of investigating a potential target company to ensure that it is a good fit for your business.

While due diligence can be costly, it is absolutely essential in ensuring a successful merger or acquisition.

Secondly, consider integration costs associated with M&A deals. These are costs incurred as the two businesses merge and integrate their operations. This could include IT and system integration costs, or perhaps a rebrand. 

By properly planning and executing an integration strategy, you can minimise these costs and ensure a smooth transition for your business.

Finally, other financial costs include things like taking on debt to finance the transaction, or paying a premium to acquire a company.

All in all, be sure to understand all costs involved before moving forward with a merger or acquisition, as they can have a significant impact on the financial health of your business.

3. Lost Productivity

The third type of cost is the cost of lost productivity.

Typically, this can occur when employees are unsure of their roles in the new company, or when there is confusion about how the two companies will operate going forward.

Consequently, this can lead to a decrease in productivity as employees try to figure out what they should be doing.

To avoid this from happening, be sure to align leadership across all teams; regardless of the terms of the merger or acquisition, every team must agree on the vision for the future.

Build relationships and trust with clear communication and consistent messaging. 

If employees see a lack of belief in the vision, they will become disengaged, so do not skip the relationship building phase as this could result in a long and possibly damaging integration.

In summary

Overall, there are two key areas that should never be compromised when it comes to a M&A transaction: due diligence and retaining key people.

In terms of due diligence, this will involve internal reviews and analysis, and also consulting with legal and financial experts – ensure both legal liabilities and risks are clearly identified and understood.

And by retaining key people on both the buyer side and seller side, this will impact the success of the combined entity.

Without the right people, the new company will struggle.

August 2022

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