How to Calculate Your Baseline Costs for M&A Strategy

Why Understanding Costs is Non-Negotiable for Profitable M&A Strategy

Many M&A strategy firms, particularly smaller ones, might track revenue meticulously but only ballpark their expenses. This approach is risky. To truly succeed, especially when shifting towards value-based or fixed-fee models, you must have a clear picture of how much it costs you to deliver a service.

Knowing your costs allows you to:

• Set minimum profitable pricing thresholds.
• Accurately estimate profitability on potential deals before committing.
• Identify service lines or project types that are highly profitable vs. those that are cost sinks.
• Justify premium pricing based on your efficient, well-managed cost structure.
• Make informed decisions about scaling, hiring, and technology investments.

Breaking Down Direct Costs in M&A Strategy

Direct costs are expenses directly tied to delivering a specific client project. For an M&A strategy firm, these typically include:

• Personnel Costs (Direct Labor): This is often your largest direct cost. Calculate the fully loaded cost per hour or per day for the team members directly working on the client’s project. ‘Fully loaded’ means salary/wages plus benefits, payroll taxes, bonuses, and potentially allocated training specific to that project.
  • Example: A Senior Analyst with a $150k salary, plus 25% benefits/taxes, has a fully loaded cost of $187,500/year or approximately $90/hour (assuming 2080 billable hours potential, though you’d use actual productive hours).
• Third-Party Data & Software: Costs for specific databases (e.g., CapIQ, PitchBook, Refinitiv), industry reports, or specialized software licenses used specifically for a client’s analysis.
  • Example: A one-time data pull for a specific industry might cost $500.
• Travel & Entertainment: Flights, accommodation, meals directly related to meeting with the client or visiting target/acquirer sites.
• Deal-Specific Legal/Accounting Fees (if subcontracted): If you bring in outside specialists for a specific deal and bill it as part of your cost, include it here.

Identifying Indirect Costs and Overhead

Indirect costs, or overhead, are expenses necessary to run your business but not directly tied to a single client project. These need to be calculated and allocated across all your projects or revenue streams.

Common M&A strategy firm overhead includes:

• Rent & Utilities: Office space costs.
• Administrative Salaries: Receptionists, administrative assistants, bookkeepers, office managers.
• Sales & Marketing Expenses: Website maintenance, advertising, networking events, CRM software (e.g., HubSpot - https://www.hubspot.com, Salesforce - https://www.salesforce.com).
• General Technology & Software: Core IT infrastructure, general software licenses (Microsoft 365, communication tools, project management software like Asana - https://www.asana.com or Monday.com - https://monday.com), general database access not tied to one project.
• Insurance & Legal: General business insurance, corporate legal counsel.
• Professional Development & Training (General): Training not specific to a single project.
• Non-Project Personnel Costs: Salaries for partners/principals not directly billable to projects, internal strategy or HR staff.

Methods for Allocating Costs to Projects

Once you have your direct and indirect costs, you need a method to allocate them to specific projects to understand true project profitability.

1. Direct Allocation: Direct costs are easy – assign them straight to the project they belong to.
2. Overhead Allocation (Indirect Costs): This is where it gets a bit more complex. Common methods include:
   • Percentage of Direct Labor Cost: Calculate total overhead, calculate total direct labor costs across all projects, and divide. The resulting percentage is added to each project’s direct labor cost.
     • Example: Total Annual Overhead: $500,000. Total Annual Direct Labor: $1,000,000. Overhead Rate = 50%. For a project with $50,000 in direct labor, you’d allocate $25,000 in overhead.
   • Percentage of Revenue: Allocate overhead based on the percentage of total revenue a project represents.
     • Example: Total Annual Overhead: $500,000. Total Annual Revenue: $2,000,000. Overhead Rate = 25%. For a project generating $100,000 in revenue, you’d allocate $25,000 in overhead.
   • Per Project Basis: Divide total overhead by the estimated number of projects in a period. Simpler but less accurate if project sizes vary significantly.

The key is consistency. Choose a method that reasonably reflects how your overhead supports project delivery and stick with it.

The Importance of Time Tracking (Even for Value Pricing)

Even if you price your M&A strategy services on a fixed fee or value basis, tracking the time spent on each project by different team members is absolutely critical for accurate cost calculation.

Time tracking helps you:

• Determine the direct labor cost for a specific project.
• Compare estimated time/cost vs. actuals to improve future bids.
• Identify inefficiencies in your processes.
• Understand which types of projects or clients require disproportionately more time (and thus cost).

Utilize robust time tracking software (many project management tools have this built-in, or use dedicated solutions like Harvest - https://www.getharvest.com or Toggl Track - https://toggl.com/track) to capture this vital data accurately.

Using Your Cost Data to Inform Pricing Strategy

Once you’ve calculated your fully loaded cost for a specific project or service offering, you have your absolute baseline. Your price must at least cover this cost to break even. To be profitable, you must price above this cost, targeting a healthy profit margin.

Knowing your costs is essential for:

• Cost-Plus Pricing: Calculating cost and adding a desired profit percentage (e.g., Cost + 30% profit).
• Value-Based Pricing: While value determines the ceiling of your price (what the client is willing to pay based on transaction outcome), your costs determine the floor. You ensure profitability by ensuring the value-based price is sufficiently above your calculated cost.
• Tiered/Packaged Services: Accurately calculating the cost of delivering each tier or package allows you to set profitable price points for different levels of service.

Presenting complex M&A strategy service packages, add-ons, or tiered structures effectively to clients can be challenging with static PDF proposals. Tools designed for interactive pricing, like PricingLink (https://pricinglink.com), can help you clearly display different options, show how costs translate into value-based pricing tiers, and allow clients to configure services, streamlining the discussion around value and price. PricingLink focuses specifically on creating these interactive pricing experiences via shareable links.