A break-up fee (termination fee) is a payment required when a signed merger or acquisition agreement terminates under defined circumstances, compensating the jilted party for expenses and opportunity cost.

How it works

Buyer and seller sign a definitive agreement with a break-up fee if the seller’s board accepts a topping bid or if shareholder vote fails after buyer meets conditions. Fees are often expressed as a percentage of equity value or a fixed cash amount sized to diligence and break costs, not full deal value.

Reverse break-up fees may require the buyer to pay if antitrust or financing failure blocks close without cause. In /glossary/bilateral-process LOIs, exclusivity clauses pair with smaller break fees to discourage parallel negotiations.

Venture-backed boards analyze whether paying a break-up fee to pursue a superior offer still maximizes shareholder value net of the penalty. Reverse fees also shape behavior when buyers walk away for reasons within their control — sellers negotiate reciprocal protections when strategic value is time-sensitive.

Why it matters

• Founders: Negotiate fee triggers and caps before exclusivity; personal liability rarely applies — the company pays from deal proceeds or cash reserves.
• Investors: Preferred holders approve merger terms including fees; liquidation waterfall determines who receives termination payments if deal fails differently.
• Operators: Employee communication waits until signing — break-up scenarios stay confidential.

Common mistake

Signing exclusivity with a punitive break-up fee before validating buyer financing and regulatory path. Weak buyers use fees to lock sellers while delaying close.

Related ideas

Exclusivity, LOI, /glossary/auction-process, and fiduciary out provisions.