What Is a Breakup Fee?

Felicia Dye
Felicia Dye
Man climbing a rope
Man climbing a rope

A breakup fee refers to costs paid when an expected deal is not fulfilled. It is generally paid when an expectant buyer is disappointed because a seller chooses not to sell, but the fee may be paid under other circumstances. This fee covers a wide range of losses to the disappointed party, such as opportunity costs and money spent to obtain financing or legal guidance. The amount that is paid tends to vary, but it is commonly calculated on a percentage basis, although other terms may be reached.

A breakup fee is an expense that is sometimes incurred upon the cancellation of a sales deal. If party A decides to sell something to party B but then party A later decides not to go through with the sale, party B may be given a sum of money. Party A may back out of the deal for any number of reasons. The terms surrounding the breakup fee are generally outlined and will determine which warrant payment.

There may be circumstances under which a breakup fee is characterized by nontraditional terms. One example is a deal in 201l that involved Google, the buyer, attempting to acquire Motorola Mobility, the seller. With that deal, the buyer agreed to pay the seller an uncommonly large sum of money if the deal did not go through. This breakup fee agreement was prompted by concern that the deal was at risk of being blocked by government regulators.

A breakup fee is paid to cover the expenses that the disappointed party may have incurred. These may include opportunity costs, wasted time, and wasted resources utilized in pursuit of the deal, such as of the value of the deal. When the two parties agree, the details are usually outlined in a letter of intent or a similar document.

As there is a possibility that business may be disrupted or that substantial costs may be incurred in preparation for the closing of a deal, a breakup fee is often an important consideration. The inability to agree on the terms can be significant enough to prevent the parties from pursuing a deal. This does not mean that every deal involves a breakup fee or that it is something that needs to be discussed. The larger the deal, the more likely the need for this type of protection, but the decision for or against is often best made with the assistance of a lawyer.

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