Glossary

Breakup Fee

A breakup fee is a defined payment owed by one party if a signed deal terminates under specific circumstances, often used to discourage walk-away or to cover the other party's costs.

Plain definition

What it means.

A breakup fee is a contractual payment owed by one party to the other if a signed deal is terminated under specified conditions. The fee is calculated as a percentage of deal value, typically 1 to 4 percent, and is triggered by defined termination events such as the seller accepting a superior offer or the buyer walking under specific circumstances.

Breakup fees are bilateral or unilateral. A bilateral fee is owed by either party under the relevant trigger. A unilateral fee, also called a reverse termination fee in some structures, is owed by only one party. Sellers in private deals are most often the obligor when the trigger is acceptance of a superior offer.

A breakup fee is the price of changing course after the deal is signed. The triggers decide who pays and when.

What goes wrong

The failure pattern this term exists to prevent.

The fee that locked out the better deal

A superior offer arrives after signing. Under the breakup fee, the seller would pay 3 percent to walk. The superior offer is 5 percent better than the existing deal. After the breakup fee, the seller nets only 2 percent better, plus the friction and timing risk of a new transaction. The fee priced out a real alternative.

The reverse termination fee that was easier to pay

The buyer signs with a financing contingency and a defined reverse termination fee for failure to fund. When financing falls through, the buyer chooses to pay the fee rather than scramble to close. The fee was below the cost of forcing the deal through. The seller is left with no transaction and a smaller payment than expected.

The trigger that did not actually fire

The breakup fee is triggered by specific events. The deal terminates for a reason that does not fall within those events. The walking party owes nothing. The other side is left with deal costs, advisor fees, and lost opportunity, and no recovery under the fee.

The expense reimbursement that compounded the fee

The agreement includes both a breakup fee and an expense reimbursement clause. A walk triggers both. The departing party pays the fee plus the other side's deal costs, which can include investment banking, legal, accounting, and other transaction expenses. The total exit cost is significantly higher than the fee alone suggested.

Founder questions

The questions people actually ask.

What is a typical breakup fee size? Breakup fees in M&A transactions typically range from 1 to 4 percent of deal value. Higher percentages tend to face scrutiny from courts as potentially deterring superior offers. The exact size reflects deal size, market norms, and the relative negotiating posture of the two sides.

When does a breakup fee actually trigger? Common triggers include the seller accepting a superior offer, the seller's board changing its recommendation, failure of seller shareholder approval, or specific buyer-side defaults. The exact triggers are written into the termination provisions of the definitive agreement and shape who actually carries the cost when a deal falls apart.

What is a reverse termination fee? A reverse termination fee is a payment owed by the buyer if the buyer walks or fails to close under specified circumstances. It is most common when the buyer's ability to close is conditional, such as on financing or regulatory approval. The size and triggers are negotiated and often differ from the seller-side breakup fee.

How does a breakup fee differ from liquidated damages? A breakup fee is a fixed payment tied to specific termination events. Liquidated damages are a contractual estimate of harm if the contract is breached and are typically tied to actual breach rather than termination. Both can apply in the same agreement and both can be enforced subject to court review of reasonableness.

Bigger picture

Where this fits in the structure.

Related structure No-Shop

The no-shop limits the seller's ability to engage other buyers. The breakup fee prices the cost of doing it anyway. The two together shape how reversible the seller's commitment actually is.

Exclusivity defines the window. The breakup fee defines the cost of stepping outside that window. The two often appear together in M&A term sheets.

Related structure MAC Clause

A MAC clause is the buyer's exit ramp without a fee. A breakup fee is the exit ramp with a price. Both shape who carries the risk between signing and closing.

Related reading

Read the operating version next.

Related reading

If a breakup fee is being negotiated or has been triggered around a deal, that is a different conversation.

Bring the term sheet, the proposed fee structure, and the termination triggers as drafted.

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