Loading the player...

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 accrued by a business in relation to the efforts involved in acquiring a new customer.

BREAKING DOWN 'Acquisition Cost'

Acquisition costs provide a reflection of the true amount paid for fixed assets before sales tax is applied, for expenses related to the acquisition of a new customer, or for the takeover of other firms. Acquisition costs are useful because they recognize a more realistic cost on a company's financial statements than using other measures. For instance, the acquisition cost of property, plant and equipment (PP&E) recognizes any discounts or additional costs that the company will experience and is often referred to as the book value of the asset in question.

Qualifying Acquisition Costs for Fixed Assets

Aside from the price paid of the asset itself, additional costs may also be considered part of acquisition when these costs are directly tied to the acquisition process. For example, if the asset in question requires legal assistance to complete the transaction, legal and regulatory fees are also an applicable cost of acquisition. Commissions associated with the purchase may also be included, such as those paid to a real estate agent when dealing with a property transaction, to a staffing company for placing an employee, to a marketing firm for acquiring customers, or to an investment bank for brokering a merger.

With regard to manufacturing or production equipment, any costs associated with bringing the equipment to an operational state may also be included in the cost of acquisition. This includes the cost of shipping & receiving, general installation, mounting and calibration.

Customer Acquisitions

Customer acquisition costs are those funds that are used in order to introduce new customers to the company's products and services in hopes of acquiring the customer’s business. The customer acquisition cost is calculated by dividing total acquisition costs by total new customers over a set period.

Understanding customer acquisition costs assist in planning future capital allocations for marketing budgets and sales discounts. Costs traditionally associated with customer acquisition include marketing and advertising, incentives and discounts, and the staff associated with those business areas, along with other sales staff or contracts with external advertising firms. Incentives may be expressed in various formats, such as buy-one, get-one-free deals, receiving another product free with purchase, upgraded service at no additional cost to the customer, gift cards or bill credits.

One business sector with a high occurrence of promotions directed at new customers is the wireless and cellular industry. For example, in 2014, AT&T offered wireless subscribers double the amount of data traditionally offered with its plans at no additional cost to the consumer. This provided potential new customers an incentive to consider signing up for service with AT&T over other wireless carriers, but was recorded as an acquisition cost because the company was not able to book revenues that it would otherwise count on.

RELATED TERMS
  1. Acquisition Premium

    An acquisition premium is the difference between the estimated ...
  2. Acquisition Adjustment

    An acquisition adjustment pertains to the premium a business ...
  3. Defensive Acquisition

    Defensive acquisition is a corporate finance strategy describing ...
  4. Accretive Acquisition

    An accretive acquisition is one that will increase the acquiring ...
  5. Production Cost

    Production costs are costs incurred by a business when manufacturing ...
  6. Adjusted Cost Base (ACB)

    An adjusted cost base is the change in book value of an asset ...
Related Articles
  1. Small Business

    What Merger and Acquisition (M&A) Firms Do

    For a business planning to make a deal, it can be intimidating. This is why merger and acquisition firms step in to lead the buying and selling process.
  2. Investing

    The Five Biggest Acquisitions in History

    Here's a list of the top acquisitions in the history of global corporations.
  3. Financial Advisor

    Acquire a career in mergers

    This exciting sector demands a lot from its advisors. Are you up for it?
  4. Small Business

    The Basics Of Mergers And Acquisitions

    Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work.
  5. Insights

    Avoid Betting on These Acquisition Target Stocks (PFE, AGN)

    Many target stocks high on acquirers list are trading at deep discounts. Here’s why investors should avoid them.
  6. Small Business

    In Small Business, Success Is Spelled With 5 "C"s

    Incorporating these steps will help your business thrive in a competitive market.
  7. Investing

    IPOs Are Becoming Less Attractive for Companies

    U.S. companies are choosing to be acquired instead of going public
RELATED FAQS
  1. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
  2. How do I evaluate whether a company is a good acquisition candidate?

    Evaluate whether a company is a good acquisition candidate by analyzing its price, debt load, litigation and financial statements. Read Answer >>
  3. How company stocks move during an acquisition

    During an acquisition, there's a short-term impact on the stock prices of both companies. Typically, the target company's ... Read Answer >>
  4. How are cost of goods sold and cost of sales different?

    Cost of goods sold and cost of sales both represent the direct costs involved in production. However, some companies use ... Read Answer >>
  5. What is an adjusted cost basis and how is it calculated?

    Learn what adjusted cost basis is, how it is calculated, and why this metric is important for investors, business owners ... Read Answer >>
  6. What Is a Tuck-In Acquisition?

    A tuck-in acquisition gives a company new capabilities at a lower cost than creating them itself. Read Answer >>
Trading Center