What Does Dead Deal Cost Mean?
A dead deal cost is an expense incurred by a buyer and/or seller for transactions that don't close. Dead deal costs can start accumulating after a letter of intent (LOI) is signed, as this is when due diligence occurs, entailing significant internal and external time dedicated to vetting the assumptions in the proposed transaction.
While buyers are usually the ones that incur the majority of these costs through due diligence, sellers also can incur costs and are, thus, better off selecting a buyer with a positive history of closing deals (even if the purchase price isn't as high as another offer from a more suspect buyer).
Divestopedia Explains Dead Deal Cost
Deal costs are inevitable, but they become "dead" if a transaction progresses through due diligence but doesn't close. While they can be considered a "cost of doing business" for acquirers, most sophisticated buyers attempt to avoid them by ensuring a high probability of closure for any deal under consideration. Again, costs "die" when deals "die," so to keep costs "alive," the deal must close, at which point the costs become a part of the transaction's enterprise value (rather than just being written off).
In addition to the the internal time dedicated to a deal, some typical third party deal costs that buyers and sellers incur include:
- Legal costs for due diligence and drafting the purchase and sale agreement and other supporting agreements, such as employment contracts and non-competes, etc.;
- Financial costs for the quality of earnings review, internal controls review and working capital assessments;
- Appraisal costs for properties and/or equipment;
- Environmental assessments if a property is being purchased or leased; and
- Tax counsel costs to assess the most tax-effective treatment of the transaction for both the seller and buyer.