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.