what is an acquisition cost 
an acquisition cost also referred to as the cost of acquisition is the total cost that a company recognizes on its books for property or equipment after adjusting for discounts incentives closing costs and other necessary expenditures but before sales taxes an acquisition cost may also entail the amount needed to take over another firm or purchase an existing business unit from another company additionally an acquisition cost can describe the costs incurred by a business in relation to the efforts involved in acquiring a new customer understanding acquisition costsacquisition costs are the expenses incurred in procuring assets goods or services they re the cost necessary for business operations but they may come up with an upfront cost the significance of acquisition costs transcends mere financial transactions they serve as vital metrics for evaluating the efficiency and efficacy of procurement processes it can also act as a barrier to entry for specific goods and industries acquisition costs can also have influence over pricing strategies profit margins and overall competitiveness within the marketplace businesses must strike a delicate balance between minimizing acquisition costs to enhance profitability and ensuring that quality and value remain uncompromised for example it may be cheaper to procure certain goods however these may be lower quality or less unique and do not satisfy customer needs types of acquisition coststhe list below is not meant to be exhaustive instead use this list as a reference to potential types of acquisition costs acquisition costs can include an acquisition cost can be paid for well after something has been acquired the timing of an expense can be misleading so be cautious when analyzing total acquisition costs importance of acquisition coststracking acquisition costs is important for a few reasons first it facilitates financial planning and budgeting by providing insights into future expenses associated with acquiring assets or goods this optimization can help a company with its profitability and operational efficiency as it knows what it will need to spend for future acquisition costs monitoring acquisition costs is also important for profitability analysis by understanding the impact of acquisition costs on overall profitability businesses can assess the financial viability of projects for example a product may have a profit margin of 60 however it may cost the company five times as much in acquisition costs as any other product the company should do a profit analysis and review its long term plans to make sure the plan fits its portfolio especially from a profit recovery standpoint tracking acquisition costs supports strategic decision making processes such as mergers acquisitions and investments in the example above a company may find itself in a similar situation but regarding the acquisition of a competing company by understanding how its financial picture will shape up after the acquisition the acquiring company can better understand whether the buy is a good decision investopedia julie bangacquisition costs and taxesacquisition costs and taxes are somewhat interconnected taxes may directly impact acquisition costs through various channels including import duties sales taxes and value added taxes vat similarly sales taxes or vat imposed on the sale of assets can significantly inflate acquisition costs affecting the affordability and financial feasibility of acquiring assets for businesses one thing to keep in mind is irs treatment for acquisition costs as well depending on what the cost is a company may have a specific tax treatment of the cost for example when starting a business many different types of expenses should be capitalized these costs include a survey of potential markets advertisements salaries or travel there are also specific rules around recoverable acquisition start up costs when buying an active business 1acquisition costs and goodwillacquisition costs and goodwill are closely related components of accounting for business when a company acquires another business goodwill arises when the purchase price of an acquired business exceeds the fair value of its identifiable net assets assets less liabilities at the acquisition date goodwill represents the premium paid for the business over and above the fair value of its tangible and identifiable intangible assets goodwill is considered an intangible asset on the acquirer s balance sheet it s reviewed from time to time and can be written up or down it s important to note that goodwill can be recorded at the time of an acquisition but it isn t technically an expense like other forms of costs there s no invoice related to goodwill however it is the value that the acquirer must pay for based on the inherent value of a company the presence of goodwill reflects the value attributed to intangible factors such as brand reputation customer relationships skilled workforce and strategic positioning these can not be separately identifiable and measurable from the acquired business s net assets however they may be directly correlated to why a company is acquiring another so goodwill and acquisitions are very closely related example of acquisition costhome depot s announcement to acquire srs distribution inc marks a strategic move aimed at expanding its offering and capabilities for professional customers this acquisition aligns with the home depot s objective to better serve complex project purchase occasions through this acquisition the home depot anticipates an expansion of its total addressable market by approximately 50 billion 2from a financial perspective home depot plans to fund the acquisition through a combination of cash on hand and debt this shows a bit of confidence in the move as the company is paying for the acquisition costs by incurring debt the total transaction value acquisition cost is 18 25 billion 3