What are Transaction Fees?
A transaction fee is an amount of money payable as a result of using a service to help complete an M&A transaction. The fees are payable in cash to the service provider (a professional or firm). These fees are common in M&A cash deals, where the equity of the target company is purchased using cash.
M&A transactions are long and often complicated processes which require the assistance from numerous professionals. A key component of M&A transactions analysis is the sources and uses of funds table, which outlines the items used to finance the transaction (and other associated costs) as well as all costs associated with the transaction. Transaction fees are a use of funds and need to be considered as part of the total cost of the deal.
Key Learning Points
- M&A transactions are lengthy processes which require the services of many professionals (accountants, general advisory and legal services etc.)
- Transaction fees is an amount of money payable as a result of using a service to help complete an M&A transaction
- Transaction fees are treated as a use of funds and need to be considered in M&A cash deal analysis
- There are three main types of transaction fee: advisory, debt issuance and equity issuance
Types of Transaction Fee
In principle, there are three main types of transaction fee.
Advisory fees are those paid to anyone involved in the transaction in an advisory capacity, such as bankers, lawyers and accountants. These fees are paid in cash, and the amounts are calculated based on the total enterprise value of the transaction. These fees are expensed immediately after the deal during the year in the income statement.
Debt Issuance Fees
Debt issuance fees are payable to the underwriters of debt for helping to issue debt into the market. The amount is paid in cash and is usually capitalized and then amortized over the term of the debt using the effective interest method. This means they are not expensed into one expense, and may be expensed across multiple income statements depending on the duration of the loan term.
Equity issuance fees are payable to brokers and banks for helping to issue shares out into the market. The fees are kept by the equity underwriters after the sale of the shares and are paid by the new equity investors as part of the share consideration.