Transaction expenses: Overview, definition, and example
What are transaction expenses?
Transaction expenses are the costs incurred by parties when executing a financial or business transaction, such as a merger, acquisition, loan agreement, or securities offering. These expenses may include legal fees, regulatory filing costs, accounting and auditing fees, advisory services, due diligence costs, and administrative expenses required to complete the transaction.
For example, in a merger agreement, both companies may hire financial advisors and legal counsel, incurring transaction expenses related to structuring the deal, conducting negotiations, and fulfilling compliance requirements.
Why are transaction expenses important?
Transaction expenses are important because they can significantly impact the financial outcome of a deal. Understanding and clearly defining who bears these costs ensures fairness, transparency, and predictability for all parties involved.
For businesses, proper planning and allocation of transaction expenses help manage budgets, avoid unexpected financial burdens, and ensure compliance with contractual and regulatory obligations. Many agreements include provisions that specify which party is responsible for transaction expenses—whether they are split, paid by one party, or deducted from the deal proceeds.
Without clear provisions on transaction expenses, disputes may arise over who is responsible for covering costs, potentially delaying or jeopardizing the transaction.
Understanding transaction expenses through an example
Imagine a private equity firm acquires a manufacturing company for $200 million. The transaction expenses include:
- $5 million in investment banking fees,
- $2 million in legal fees, and
- $1 million in regulatory filings and due diligence costs.
The purchase agreement states that each party will bear its own transaction expenses, meaning the seller covers their own legal and advisory costs, while the buyer absorbs the costs of financing and structuring the deal.
In another example, a real estate developer secures a $50 million loan for a new commercial project. The loan agreement specifies that all transaction expenses—such as loan origination fees, legal documentation costs, and appraisal fees—will be deducted from the loan proceeds before disbursement. This means the developer receives slightly less than the full loan amount upfront.
An example of a transaction expenses clause
Here’s how a transaction expenses clause might appear in a contract:
“Each party shall bear its own transaction expenses, including but not limited to legal fees, accounting fees, advisory costs, and due diligence expenses, incurred in connection with this Agreement. Unless otherwise agreed in writing, no party shall be entitled to reimbursement of such expenses from the other party.”
Conclusion
Transaction expenses are a crucial aspect of business deals, covering the costs associated with legal, financial, and administrative aspects of a transaction. Clearly defining who is responsible for transaction expenses in contracts helps prevent disputes, ensures financial clarity, and allows all parties to budget effectively. Proper management of these costs is essential for successful deal execution and regulatory compliance.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.