If you have decided that 2025 is the year to embark on an acquisition, then you’re probably wondering how much such a substantial transaction is going to cost you. This is where that all-important acquisition cost formula comes in, which we will be sharing with you in this handy guide.
Also known as ‘book value’, acquisition cost refers to the amount of money one business must pay to purchase another company (or, depending on the circumstances, its assets, whether that is products, land, or machinery and equipment).
Acquisition cost can be complex and include several different fees and adjustments, including any incentives or reliefs that may be applicable. There are also several different kinds of acquisitions you can make, which govern how significant your end cost will be.
Let’s have a more detailed look at the acquisition process and how to calculate acquisition cost so you will know what options are available to you in terms of business acquisition finance.
First things first – what’s your acquisition strategy?
Types of acquisition and their pros and cons
There are two main options available to potential acquirers as they size up a potential target. These options are an asset sale or a shares sale.
As the name suggests, if the seller is offering an asset sale, then the acquirer will be able to purchase some, or all, of the target business’s assets. As mentioned above, these can consist of equipment, machinery, products and even land.
On the other hand, a shares sale is just that – a sale of shares in the company.
Each type of acquisition has its own unique pros and cons. For example:
Taxation
One of the downsides of a share sale is that it can result in the buyer having to pay stamp duty and a tax deed will probably be required to protect you against any tax liabilities incurred by the business before you purchase it.
An asset sale, meanwhile, does not typically require stamp duty and could even bring you tax relief in the form of a VAT exemption if the business is advertised as a ‘going concern’.
Consent
Different kinds of consent will be required from different parties depending on what kind of acquisition you are aiming for.
As a prime example, if you are embarking on an asset sale and you want to continue to lease the target business’s property then you will have to gain the consent of the landlord to do so.
On the other hand, if you have chosen the share acquisition route and you wish to purchase 100% of the company’s shares, then you will need to gain the consent of all the business’s existing shareholders.
Due diligence
If you have acquired before – or made any other significant kind of purchase – then you’ll surely be familiar with the importance of due diligence and its potential complexity.
Due diligence is arguably the most critical stage of the M&A process, as the information you can gain during this period of research can make or break the acquisition. However, the duration and complexity of due diligence can vary depending on the type of acquisition you opt for.
An asset purchase will typically require a less time-consuming due diligence process as you will not need to worry about inheriting problematic liabilities. A share sale, on the other hand, will require rigorous due diligence to identify any hidden problems or pitfalls that could raise their heads once the purchase has been completed.
Calculating acquisition cost
The most common method of calculation to work out how much an acquisition will cost is this:
Acquisition cost = (Expenses related to the acquisition + cost of acquisition) – (taxes + depreciation + amortisation + impairment costs)
When it comes to the price of the target business itself, this will obviously vary widely depending on the size and kind of company.
Whatever type of business you’re purchasing, however, it’s important to have a valuation carried out to make sure that the seller is asking for a price reflecting the company’s true market value. Overpaying is a common mistake made by acquirers, so taking the time to have a comprehensive valuation carried out can potentially save you a significant amount of money.
Business acquisition finance
Once you’ve calculated how much your acquisition is going to cost you, it’s time to focus on financing your deal.
There are several options available to you, each one with its own unique terms and conditions that you will need to be aware of.
Business acquisition loan
A frequently used source of financing is a loan from a bank or credit union. As with personal loans, this involves taking out the full amount of money required to make the purchase and then paying it back over a set time frame.
Because acquiring businesses tend to benefit from their new purchase by scaling up and becoming more profitable, in theory it should be relatively easy to pay back the loan.
Debt financing
Another common method of acquisition financing is funding the transaction through selling bonds. This option is often used by businesses who don’t have the upfront capital available to buy their target.
Equity
This flexible form of financing tends to be used if the company being acquired is operating within a volatile industry where significant profits cannot be guaranteed. Equity financing involves the purchase of company shares by investors. A downside of this method is that it is usually more costly than other forms of financing.
Subordinated debt
Also known as ‘mezzanine debt’, this customisable method is a mixture of equity and debt financing and is typically used by acquirers who don’t want to take out a loan. Subordinated debt is a flexible and bespoke method of funding an acquisition and can work well for businesses with a solid cash flow and steady growth projections.
How a business broker can help
Hopefully this guide has provided you with some helpful insights into acquisition cost, how to calculate it and the types of business acquisition finance available to you.
However, if you have more queries about acquisition cost, or any other aspect of the M&A process, then it may be worth hiring a business broker to oversee the transaction on your behalf.
Business brokers bring years of expertise and skill to your acquisition strategy, removing all the stress and hard work from the process and helping you achieve the right deal for your requirements.
An experienced business broker – like our team at Harris Acquire – will manage every stage of the acquisition journey, from verifying acquisition targets to handling due diligence and negotiations. What’s more, they can also provide nuanced insights on the financing options that may work best for you.
Cost-effective acquisition with Harris Acquire
If you’re keen to get the ball rolling with your acquisition in 2025, here at Harris Acquire we would love to be part of your journey to successful deal completion.
To find out about more about our acquisition finder and management service (which includes a 30-day money-back guarantee), don’t hesitate to contact us on 01926 757100 or send an email to Hello@harrisacquire.com.
We look forward to helping your business spread its wings!
