What is a break-up fee?
A break-up fee is an amount that must be paid to a potential buyer if the seller calls a transaction off without good reason (i.e., usually to accept a better offer). The break-up fee is meant to compensate the potential buyer for the cost and effort of researching a potential acquisition and making the bid. If the deal falls apart through no fault of the buyer, the buyer should be compensated for the cost and effort expended. Although not consistent with the stated theory behind use of break-up fees, these arrangements may also include an additional payment above and beyond the expenses representing the lost time and opportunity. This is to both compensate the buyer and to encourage the seller not to enter into the sales agreement unless it is likely the transaction will close.
