Break-up fee

A break-up fee, also known as a termination fee, is a contractual provision in a merger or acquisition agreement that requires one party to compensate the other if the deal falls through or is terminated under certain circumstances. It is typically paid by the party that fails to proceed with the transaction and serves as a form of financial protection for the party that invested time, resources, and opportunity costs in pursuing the deal. The break-up fee helps offset the costs and potential losses incurred by the other party due to the failed transaction. For example: Company X and Company Y are in discussions for a potential acquisition. To show their commitment to the deal, Company X agrees to pay a break-up fee of $100,000 to Company Y if they decide to back out of the agreement for non-performance or breach of terms. This break-up fee serves as a form of compensation for Company Y's time, effort, and opportunity costs involved in negotiating the deal and preparing for the potential transaction.