What Does
Break-up Fee Mean?
A break-up fee is paid in an acquisition by the party that decides not to pursue the deal. The break-up fee can be paid to either the buyer or the seller. A seller may ask for a break-up fee if not completing the deal would have a negative consequence on the seller, if the sales process is disruptive to the operation of the business, or when the seller has been approached with an unsolicited offer. A break-up fee offered in the letter of intent will show the buyer’s commitment to completing the acquisition.
Similarly, a buyer will ask for a break-up fee if the seller has the option to shop the deal to other buyers. The break-up fee paid to a buyer will be a reimbursement for transaction costs incurred if the deal does not close due to the seller’s actions.
Break-up fees can range from 1-3% of the total deal value.
Divestopedia Explains Break-up Fee
Break-up fees are not common in mid-market transactions for privately held businesses. This is probably because closing a mid-market deal is difficult enough, and introducing a break-up fee would deter potential buyers from even bidding in controlled auctions. After signing a letter of intent, it is usual for a buyer to request exclusivity on the deal for a certain period of time (commonly 60 to 90 days). If the seller is not willing to offer exclusivity, the buyer may then request a break-up fee paid if the deal is closed with another party. This fee would act as a reimbursement for all legal and due diligence costs incurred.