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Comparison

Break-up fee vs reverse break fee

A break-up fee is paid by the target to the bidder if the target walks. A reverse break fee is paid by the bidder to the target if the bidder walks.

Attribute Break-up fee Reverse break fee
Direction of payment Target → Bidder Bidder → Target
Trigger Target accepts a superior proposal; board changes recommendation; deal vote fails Bidder fails to obtain financing; bidder fails to obtain regulatory clearance; bidder repudiates
Typical magnitude (US PE deal) 2–4% of equity deal value 4–8% of equity deal value
Magnitude in higher-risk deals Up to ~5% in some sponsor LBOs Up to 8–10% when regulatory risk is high
Delaware scrutiny Excessive size can be challenged as preclusive of board fiduciary duty Generally not challenged as preclusive (target is the protected party)
Exclusive remedy? Sometimes — but rarely the bidder's only recourse Often — sponsor LBOs frequently make the RTF the sole remedy for failed close
Two-tier structure (go-shop) Lower fee during go-shop window; higher after Single tier typical
Common interaction Paid by surviving company after a successful topping bid Paid by sponsor after a financing or antitrust failure

When the comparison matters

Both fees compensate the non-walking party for time, money, and lost opportunity. The asymmetric magnitudes (RTFs typically larger) reflect the asymmetric risk: target boards lock down for months; bidders need a real deterrent against walking when financing or regulators don’t cooperate.

Specific performance vs reverse break fee

Sophisticated targets in PE deals negotiate hard on whether the RTF is the sponsor’s exclusive remedy or whether the target retains specific-performance rights. Specific performance — court-ordered closing — substantially shifts the negotiating posture; sponsors prefer to cap exposure at the RTF.

Guides

Glossary