Breakup Fees

searcher profile

January 03, 2018

by a searcher from Babson College - F.W. Olin Graduate School in Boston, MA, USA

I've spoken with some smaller PE shops in the Northeast over the past year and a few have talked about how they like to include a breakup fee in their LOI's to hedge against potential losses from a seller walking away from a deal.  Have any Searchers utilized these in their LOI's?  If so, would anyone be willing to share an example?  Any feedback would be helpful.  Thank you,

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commentor profile
Reply by an intermediary
from State University of New York at Stony Brook in Boynton Beach, FL, USA
Beakup fees are used mostly, if at all, in very large deals. I don't see any advantage of putting such roadblocks in the way of productive discussions for most deals. However, I do see the benefit of using Letters of Intent (LOI) in a more effective way. By including most of the tough issues in the LOI, much time, money and deal-killing surprises are avoided during due diligence and during the creation of the definitive purchase documents. Yes, you may spend a bit more time and legal fees creating an effective LOI, but that will be small compared to the savings of time and money as the deal progresses. An LOI could address issues such as working capital expectations and asset allocation, both of which tend to be serious road blockers as the deal nears completion. Instead of breakup fees, it is a far better approach to use the LOI to structure the milestones and timing of the entire purchase process. It is best to agree to specific chunks of time by which certain milestones must be met. If not met, a party can withdraw. Otherwise, things can drag on causing everyone to spend extra time, money and emotional capital. An example would be to have the basic financial due diligence completed within 30 days or less. At that time, both parties sign off and the next issue of complexity is addressed and resolved. Likewise, it's best to include the timing of the creation of definitive purchase documents within the LOI schedule. The milestones and timeline should be well-defined with mutually agreed upon "stop or continue" decision points. Neither the buyer nor the seller benefits from due diligence dragging out indefinitely, assuming all parties are acting in good faith.
commentor profile
Reply by a searcher
from University of Pennsylvania in Houston, TX, USA
I had one in the last LOI that I was under, text is below. Didn't protect against seller walking away from a sale - not sure you'll get away with that, it was more intended to recoup costs if seller broke exclusivity. I thought I'd get push back from sellers but there was none. "Break-up Fee. In the event that Seller breach Paragraph 16 [Exclusivity] and, within twelve (12) months after such breach, either Seller or the Company close a transaction relating to the acquisition of a material portion of the equity of the Company or its assets or business, in whole or in part, whether through direct purchase, merger, consolidation or other business combination, then, immediately upon such closing, Seller shall pay, or cause the Company to pay, to Buyer the sum of all accrued professional services fees incurred in pursuit of the Transaction, capped at $200,000, plus $75,000 to compensate Buyer for time and effort in pursuit of the Transaction."
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