Business, Legal & Accounting Glossary
A dead deal cost is an expense spent by a buyer or seller in the event that a transaction does not conclude. After a letter of intent (LOI) is signed, dead deal costs can begin to accumulate, as this is when due diligence commences, requiring significant internal and external time to verify the proposed transaction’s assumptions.
While buyers often spend the majority of these costs through due diligence, sellers can incur costs as well and are therefore better off selecting a buyer with a solid track record of finishing agreements (even if the acquisition price is lower than another offer from a more questionable buyer).
While transaction costs are unavoidable, they become “dead” if a transaction proceeds to due diligence but does not close. While they can be regarded as a “cost of doing business” for acquirers, the most sophisticated purchasers seek to avoid them by ensuring that every deal under consideration has a high possibility of closing. Again, costs “die” when deals “die,” therefore in order to keep costs “alive,” the deal must close, at which point the expenses become a component of the enterprise value of the transaction (rather than just being written off).
Along with the internal time spent on a trade, buyers and sellers typically suffer the following third-party transaction costs:
Letter of Intent (LOI)
Purchase and Sale Agreement
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This glossary post was last updated: 27th January, 2022 | 4 Views.