VC & PE Glossary
What Is Reverse Break-Up Fee?
Updated
Definition
A reverse break-up fee is a payment the buyer owes the seller if the buyer fails to close a signed deal — compensating the target for lost time, exclusivity, and transaction costs.
Useful for: Founders, Investors
Reverse break-up fee is compensation paid by an acquirer to the target company when the buyer fails to complete a transaction after committing to do so.
How it works
In signed merger agreements, break-up fees usually flow seller-to-buyer if the target accepts a topping bid. Reverse break-up fees flow buyer-to-seller if the acquirer terminates without a permitted reason — common triggers include financing failure, regulatory blockage, or material breach by buyer.
Fees are often a fixed dollar amount or percentage of equity value (e.g., 3–5% of deal price in large public deals; smaller absolute sums in private venture exits). They rarely cover full opportunity cost but reimburse legal fees, management distraction, and employee retention plans tied to the deal.
Example: a strategic signs a definitive agreement at $80M. Their lender pulls financing; contract requires a $2M reverse break-up fee to the startup. Founders and investors split proceeds per cap table while restarting a sales process.
Negotiability depends on leverage. Hot assets in competitive processes win stronger reverse fees; distressed sellers may get none.
Why it matters
- Founders: Pair reverse fees with clear closing conditions and timelines; exclusivity without protection extends runway risk.
- Investors: Fee proceeds are usually corporate cash — waterfall rules determine whether preferred or common benefits.
Common mistake
Assuming a reverse break-up fee in a term sheet is guaranteed cash. Many drafts limit triggers narrowly (regulatory only) or cap fees below actual disruption cost.
Related ideas
See also break-up fee, letter of intent, change of control, and escrow.
Related terms
- Break-Up Fee — A break-up fee is a contractual payment owed if one party terminates an M&A agreement under specified conditions — often when the seller accepts a superior offer after signing exclusivity with a first buyer.
- Letter of Intent — A letter of intent (LOI) is a non-binding or partially binding document that outlines the key terms of a proposed deal — acquisition, partnership, or major contract — before full definitive agreements are drafted.
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Common questions
Short answers for founders, LPs, and operators