Who Pays for Due Diligence Costs: Buyer or Seller?

In a standard UK M&A deal, each side pays for its own advisers, and the buyer carries the cost of buy-side due diligence. That is the default rule, and it holds in the great majority of mid-market transactions: the buyer instructs and pays the financial, legal, tax, and commercial DD providers investigating the target, while the seller pays the advisers running the sale. There is no general principle that the target reimburses a buyer for kicking the tyres. So when people ask who pays for due diligence, the short answer is "the party that commissioned it," which usually means the buyer for the work that matters most to the deal.

The reason the question keeps getting asked is that the default has interesting exceptions, and they are where real money moves. The seller often funds vendor due diligence to control an auction. Buyers sometimes negotiate cost-cover or expense-reimbursement terms. And on a deal that breaks, both sides can be left holding sunk fees with no transaction to absorb them. Cost allocation, in other words, is mostly settled by who instructed whom and what the engagement letter says about scope.

What is the default rule on who pays for due diligence?#

Each side bears its own transaction costs, and the buyer funds the diligence it commissions on the target. A corporate or private-equity buyer instructs its own financial, legal, tax, and commercial advisers, signs their engagement letters, and pays their fees; the seller pays the corporate finance adviser and lawyers running the disposal. Neither side automatically pays for the other's work.

On a UK mid-market deal, combined buy-side advisory fees commonly run 1% to 3% of enterprise value, with the percentage falling as the deal gets larger. That is real money on any transaction, and almost none of it is recoverable from the counterparty as a matter of course. The buyer is funding an investigation it might walk away from, which is precisely why the terms of those engagements matter as much as the headline rate. For a fuller breakdown of how those advisor bills are built workstream by workstream, see the deal lead's field guide to due diligence cost management.

The "each side pays its own" default is so familiar that deal teams stop interrogating it, and that is a mistake. The default tells you who pays when everything goes to plan. It says nothing about who pays when scope expands past the engagement letter, when a buyer wants reliance on the seller's reports, or when the deal dies in week ten. Those are the cases where the cost question actually has teeth, and where the answer is negotiated rather than assumed.

What does the seller pay for in due diligence?#

The seller pays for sell-side advice and, increasingly, for vendor due diligence (VDD): independent reports the seller commissions on its own business and makes available to bidders. Financial VDD, often built around a quality-of-earnings analysis, plus commercial and legal VDD, lets the seller front-load and control the diligence narrative in a competitive auction rather than handing the process to each bidder's advisers.

VDD is a deliberate seller investment, not a courtesy to buyers. On a core UK mid-market deal (roughly £50M to £250M enterprise value), a combined VDD programme commonly runs £250,000 to £600,000, with the seller paying the cost, according to FD Capital's UK vendor due diligence guide. The seller wears that to compress the timeline, narrow the issues a buyer can reopen, and protect value across multiple bidders at once.

The cost does shift, partly, through a reliance letter. A buyer that wants to rely on a VDD report (and bring a claim against the provider if it is wrong) typically pays a reliance fee directly to the VDD adviser, commonly 20% to 40% of the original VDD fee, in exchange for a duty of care that is usually capped at a multiple of that fee. So the seller funds the report, and each relying buyer buys in. It is the closest thing UK M&A has to genuine cost-sharing on diligence, and it only exists because the seller chose to commission the work in the first place. Worth a caveat on the ranges above: VDD pricing varies widely by sector and data quality, and a messy carve-out can blow well past the top of that band.

Who pays when a deal is aborted?#

Whoever commissioned the work pays, and there is usually no transaction to absorb it. This is the expensive case nobody budgets for: the buyer has run six or eight weeks of financial, legal, and tax diligence, the deal collapses on price, financing, or a diligence finding, and the advisory fees are simply sunk. Unless an engagement was structured as pure success-fee or a contingent arrangement, the meter already ran.

Broken deals are not rare enough to ignore. In their study for the Harvard Law School Forum on Corporate Governance, Morgan Ricks of Vanderbilt Law School and Da Lin of Victoria University of Wellington found that deal breakage runs at roughly 9% of signed deals in calm markets and climbs toward 12% in periods of turmoil, drawing on a hand-collected corpus of 5,058 definitive merger agreements involving US public-company targets signed between 1996 and 2020. That dataset is US public-target heavy, so the precise rate will differ for UK private mid-market deals, but the order of magnitude (close to one signed deal in ten failing to complete) is the relevant number for anyone pricing abort risk.

The break-fee instinct does not save a UK buyer the way it might in the US. Under the UK Takeover Code's Rule 21.2, break fees and most other "offer-related arrangements" have been generally prohibited since 2011, with the Panel normally consenting to an inducement fee only in narrow situations (a competing bid, a formal sale process, or a target in financial distress) and then capped at a de minimis level, normally no more than 1% of the offer value. The Code was tightened after Kraft's bid for Cadbury precisely to stop targets locking themselves into deal-protection payments. The practical effect on public deals: a buyer cannot generally count on a contractual payment to recover its sunk diligence costs if the target walks. On private deals, cost-cover and exclusivity-with-expenses terms are negotiable, but they are a drafting outcome, not a default.

How does engagement-letter structure decide who is exposed?#

The engagement letter decides exposure, because it fixes who instructs the work, what counts as in scope, and whether the buyer pays a fixed fee or by the hour. Those three choices, far more than the headline rate, determine who absorbs the cost when diligence runs longer or deeper than planned.

The fixed-fee-versus-time-and-materials split is the cleanest illustration. Under a fixed fee for a defined deliverable, the adviser carries overrun risk inside the agreed scope, but a fixed fee only holds while the scope holds; the moment diligence uncovers a new jurisdiction or a messy data set, the extra work arrives as a change request the buyer pays for. Under time-and-materials, the buyer carries the risk continuously, an hour at a time, against an estimate rather than a ceiling. Either way, the buyer's exposure tracks scope, which is why the gap between advisor fee estimates and the actual final invoice is where budgets quietly break.

Timeline is the silent multiplier on any non-fixed engagement, because on time-and-materials or retained work, longer is the same word as dearer. BCG's analysis in its 2024 M&A Report found that around 40% of transactions took longer to close than the timeline set out at announcement, and that the average sign-to-close period for deals above $2 billion had stretched by roughly 11% over 2018 to 2022. The figure covers large deals and a US-skewed sample, so a tidy bilateral UK carve-out can still move faster, but the direction is unambiguous, and a diligence engagement priced for an eight-week window that runs for five months will not land on its original estimate whatever the structure.

The reason this lands on the deal lead rather than the adviser is that the party paying the bill is rarely the party watching the meter. The buyer instructs four or five workstreams, each on its own fee structure and cadence, and the consolidated cost picture arrives late by construction, usually with the invoices. The person who is exposed to the cost has the least real-time visibility of it, which is exactly backwards. Whoever bears the cost should be the one who can see the meter run, not just read the final bill. Keeping that meter visible is a discipline in its own right, and it is closely tied to catching due diligence scope creep before it quietly leaks into the budget and, where several advisers run in parallel, to coordinating multiple due diligence advisors on one view.

The more useful reframe for the next deal is not "how do we recover diligence costs if this breaks," which the Takeover Code and the market mostly answer with "you do not." It is "are we watching what we are committed to spend while we can still act on it," because the cost the buyer can actually control is not the rate it negotiated at kickoff but the scope it lets drift after it.

Frequently Asked Questions#

Does the buyer or the seller pay for due diligence?#

The buyer pays for buy-side due diligence it commissions on the target, and the seller pays for any sell-side or vendor due diligence it commissions on its own business. There is no default rule that one side reimburses the other; each party bears its own transaction costs unless the engagement letters or deal terms say otherwise.

How much does buy-side due diligence cost?#

On a UK mid-market deal, combined buy-side advisory fees (financial, legal, tax, and commercial) commonly run 1% to 3% of enterprise value, with the percentage falling as the deal gets larger. Almost none of that is recoverable from the seller as a matter of course, which is why scope control matters more than rate.

Who pays for due diligence if the deal falls through?#

On an aborted deal, the party that commissioned the work pays, and the fees are usually sunk with no transaction to absorb them. Deal breakage runs at roughly 9% of signed deals in calm markets, per Ricks and Lin's study for the Harvard Law School Forum on Corporate Governance, and UK public-deal break fees are generally prohibited under Takeover Code Rule 21.2, so a buyer rarely recovers its costs.

Who pays for vendor due diligence?#

The seller commissions and pays for vendor due diligence, commonly £250,000 to £600,000 for a combined programme on a core UK mid-market deal, per FD Capital. A buyer that wants to rely on those reports typically pays the provider a reliance fee, often 20% to 40% of the original VDD fee, which is the closest UK M&A gets to genuine cost-sharing on diligence.

Are M&A break fees allowed in the UK?#

Largely not on public deals. Under the UK Takeover Code's Rule 21.2, break fees and most other deal-protection arrangements have been generally prohibited since 2011, with the Panel consenting only in narrow cases and capping any inducement fee at a de minimis level, normally no more than 1% of the offer value.

Sources#

1. How Deals Die. Morgan Ricks (Vanderbilt University Law School) and Da Lin (Victoria University of Wellington), Harvard Law School Forum on Corporate Governance, 2024. Deal breakage of roughly 9% in calm markets and up to 12% in turmoil, across 5,058 merger agreements signed 1996 to 2020.
2. Rule 21.2, Offer-related arrangements. The Takeover Panel, UK Takeover Code. General prohibition on break fees and offer-related arrangements since 2011; de minimis inducement fee normally no more than 1% of offer value.
3. Vendor Due Diligence: A Complete UK Guide. FD Capital, 2025. Seller pays for VDD; combined core mid-market VDD programmes commonly £250,000 to £600,000; buyer reliance fees typically 20% to 40% of the original VDD fee.
4. The 2024 M&A Report: Deals Are Taking Longer to Close. Boston Consulting Group, 2024. Around 40% of transactions closed later than the announced timeline; average sign-to-close for deals above $2 billion rose about 11% over 2018 to 2022.