What differentiates transaction fees from financing fees in an LBO?

In an LBO (Leveraged Buyout), transaction fees and financing fees serve distinct roles in the financial structure and accounting treatment of the deal. Transaction fees typically refer to one-time costs incurred during the acquisition process, such as legal, advisory, and due diligence expenses. These costs are directly associated with the closing of the deal and are typically incurred only once. On the other hand, financing fees are related to securing financing for the transaction, such as loan origination fees or underwriting fees, which are considered ongoing costs of borrowing.

Financing fees are usually amortized over the life of the debt instrument to spread out the expense over time, reflecting the nature of these costs as associated with ongoing liabilities. They are added to the carrying cost of the debt and are recognized as interest expense over the term of the loan rather than being expensed all at once. In contrast, since transaction fees represent a one-time expense for the acquisition process, they are not subject to amortization and are typically expensed in the period incurred.

Thus, the distinguishing factor that makes one correct option is that transaction fees are indeed one-time expenses, while financing fees are amortized over the term of the financial instrument involved.