Break-up Fee

A break-up fee is a contractually agreed compensation payment that becomes due if an M&A transaction fails to close for certain reasons. It is intended to protect the party that bears costs and effort as a result of the failure, for example for due diligence, advisers and forgone alternative offers. Usually the seller pays the fee if it opts for a competing offer contrary to the agreement.

In practice, the break-up fee is typically in the range of one to three percent of the transaction value. Conversely, there is the reverse break-up fee, which the buyer pays if the transaction fails for reasons on its side, for instance a lack of financing or missing regulatory approvals.

Break-up fees increase deal certainty and discipline both sides during the negotiation phase. They are typically governed in the letter of intent or the purchase agreement. As part of our transaction structuring and M&A advisory, we negotiate balanced clauses that fit the respective exit strategy.