Costs of buying a business
Costs of business purchase in Europe
This document gives some insight into the costs of buying a company in Europe. Buying a company is part of your company’s growth strategy and needs to be correctly executed. We are not only looking at the actual out of pocket costs that we show later in the document but considering the costs from a much broader perspective. What are the costs if you purchase the wrong company and you need to repair this in the post-acquisition process, or worse, years later?
We come across many buyers for European companies and have seen a large number of business purchases. We also see which companies have been successful in acquisitions three to five years after the purchase. Based on this knowledge, we try to give you some information on which aspects to consider when you want to buy a company in Europe.
Goals of buying a business in Europe
When buying a business and assessing possible costs we suggest first going back to your company strategy. What is your company strategy and what do you want to achieve with a possible acquisition? Is acquisition the best method to grow? How does this compare to, for example, starting a greenfield operation in a foreign country?
Here is a list of possible objectives when buying a business:
- Market development (gain access to new markets)
- Product development (gain access to new products or services)
- Achieve economies of scale
- Create synergies
Buying a business could be the best solution to achieve your goal. Visit advantages of buying an existing company for a complete overview.
How well do you know your market and target companies?
An important item is how well you know the country where you want to make an acquisition. Do you already know possible target companies in this country that you would be interested in?
How well you know the target market determines if it might be wise to have a market scan done before starting the M&A process. For companies that make larger acquisitions, we often do detailed studies before starting the M&A process. This means we calculate synergies and financial returns per individual target company. You might also do this in less detail and just make an overview of the possible targets and compare the benefits of an acquisition per company. If you have limited market knowledge, this might give you a better understanding of the most suitable target company and especially, what you can achieve with an acquisition.
What are the alternatives or strategies when buying a company in Europe?
You can choose a luxury alternative where you have an adviser scan the full market for you and make detailed presentations on individual targets. In the case of larger acquisitions, this might be more suitable. We often see the complete opposite in acquisitions by private equity buyers. They pay a success fee only for the introduction to a company that is open to a business sale. In the transportation or forwarding industry, we also see a lot of buyers that pay a success fee for suitable targets open to a business sale. The risk of this approach for a buyer is that you might not get to see all the companies open to a business sale. Hence, you might end up missing the most suitable acquisition target and buy a company of lesser quality.
Who helps you to buy a business in Europe?
There are various alternatives when you start looking to buy a company in Europe. You can do this yourself or ask for help from several types of organizations. Below is a list of people that can help you in the acquisition process.
Who helps you to buy a business:
- Your lawyer
- Your bookkeeper
- An M&A adviser
- A CFIE M&A adviser
The CFIE team has a strong background in your industry which is beneficial in many aspects. It helps you to prevent buying a target that is not suitable. We provide you with an M&A adviser who speaks your language. Visit M&A adviser to select the most suitable consultant yourself.
The costs of buying a business
There are a lot of costs related to an acquisition and you have to think twice before you start the process. Our experience is that we often see a significant focus from buyers on the actual payment to an adviser for the search for suitable targets. Of course, it is very much justified that a buyer wants to keep their costs low related to a company purchase. However, we also want to stress that a buyer will incur more costs later in the process such as legal fees, due diligence, and other transaction-related costs. Further, there are a lot of possible (hidden) costs that can show up if a transaction does not bring what one had hoped it would.
The (hidden) costs of buying a business:
- Costs for research to determine the right decision and strategy
- Cost for tracking the right specialists
- Fee for the advisers and costs spent by internal employees
- Workflow and travel in the process
- Costs of bad advice or bad decisions
- Costs due to a flawed transaction that needs to be repaired after the acquisition
- Losses due to less than the expected income of the acquired company
Actual expenses of buying a business in Europe
There is a lot of secrecy around tariffs of M&A advisers. The actual costs of acquiring a company charged by advisers differ enormously. We see a variety of proposals of competitors. Sometimes we are stunned by the height of the fixed charges and other times we ask ourselves why an adviser is willing to put in so much time without any fixed compensation with the risk that no transaction will occur in the end. Below we describe an overview of payment structures we encounter in the market.
Fee structures for M&A advisers we encounter in the market:
- ‘No cure no pay’ – no fixed costs at all + Lehman formula  for success
- ‘No cure no pay’ – 4,000 EUR office costs + success fee (ranging from 2% to 5%)
- ‘Performance based’ – 4,000 EUR office costs + 4,000 EUR commitment fee + 2,000 EUR for each additional adviser + success fee
- ‘Subscription’ – 4,000 EUR office costs + fixed number of days each month at 1,500 EUR per day (at least 3 days for at least 5 months) + 2,5% success fee
- ‘By the hour’ – 2,000 EUR office costs and 95 to 500 EUR for each hour in blocks of 4 hours –no success fee (or 1% if agreed)
Normally, we make a tailor-made agreement for each client based on the background of each buyer. This offer depends on a lot of items, and we prefer to discuss this with you personally. Please do get in touch if you want to learn more about how we can help you with the acquisition process and what the related costs would be. Download our general presentation for the background of our M&A network and its advisers.
Quality is another key factor concerning the costs of buying a business. Legal aspects must be filled in correctly otherwise your acquisition might end up as a disaster. Visit legal documents in a business purchase for insights. If your plans are serious, you can already start preparing by visiting preparations for buying a business.
 The Lehman formula
A formula that is used quite often. The Lehman formula for a success fee is determined as follows:
* 5% on the first 100,0000 EUR, plus
* 4% on the second 1,000,000 EUR, plus
* 3% on the third 1,000,000 EUR, plus
* 2% on the fourth 1,000,000 EUR, plus
* 1% on everything above 4,000,000 EUR