ALERT

Hire an M&A Professional to Sell Your Business

Break-up Fee

Definition - 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.

Connect with us

Divestopedia on Linkedin
Divestopedia on Linkedin
Tweat cdn.divestopedia.com
"Divestopedia" on Twitter


'@Divestopedia'
Sign up for Divestopedia's Free Newsletter!

Email Newsletter

Join thousands of others with our weekly newsletter

Resources

  • Equicapita: Equicapita
    Equicapita's model is to acquire established, private small and medium sized enterprises (“SMEs”) located primarily in Western Canada.
  • Evolution Capital: Evolution Capital
    Leaders in growing small business.