Break-up fee: Overview, definition, and example
What is break-up fee?
A break-up fee is a financial penalty paid when a deal falls through—usually in mergers, acquisitions, or big business transactions. It’s a way to compensate the party that put time, money, and effort into a deal if the other side backs out or chooses a different buyer.
Think of it as a “sorry-we’re-not-going-through-with-it” payment. The fee is agreed on in advance and kicks in if certain conditions are met—like the seller accepting a better offer or walking away without good reason.
Why is break-up fee important?
In business deals, especially high-value ones, a lot of work happens before the ink is dry—due diligence, legal reviews, financial planning, etc. A break-up fee protects the buyer from wasting all that effort if the deal doesn’t close.
For sellers, it’s a way to show commitment to the deal while still leaving room to consider other offers. For buyers, it helps offset the cost of a failed deal and discourages the seller from backing out lightly.
Without a break-up fee, one side could walk away too easily—leaving the other with sunk costs and no deal to show for it.
Understanding break-up fee through an example
Let’s say your business offers to buy a competitor for $5 million. You spend weeks on due diligence, hire lawyers, and line up financing. But before the deal closes, the competitor gets a $5.5 million offer from another buyer—and decides to take it.
Because your agreement included a break-up fee, the competitor has to pay you $150,000 to cover part of your lost time and expenses. That doesn’t make up for the lost opportunity, but it softens the blow and holds them accountable for walking away.
An example of a break-up fee clause
Here’s how a break-up fee clause might appear in a deal agreement:
“In the event that the Seller terminates this Agreement to accept a Superior Proposal, the Seller shall pay to the Buyer a break-up fee in the amount of $200,000 within five (5) business days of such termination, as compensation for the Buyer’s costs and lost opportunity.”
Conclusion
A break-up fee is a built-in safety net for buyers in big deals. It doesn’t stop a seller from walking away, but it helps make sure they think twice before doing so—and compensates the buyer if the deal falls apart.
If you’re entering into a major transaction, especially one involving a lot of upfront work, consider negotiating a break-up fee. It shows you’re serious—and encourages the other side to be just as committed.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.