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.