What is a reverse termination fee?
A plain guide to a number on the deal list: what it is, how to read it, and the maths.
What it is
The fee the buyer pays the target if the agreement ends in one of the cases it lists. Typically, a regulator refuses approval or the buyer's financing fails.
It goes to the target company. Shareholders don't automatically receive a payment.
How the reverse fee works
Say Woodgrove agrees to buy Litware for $50.00 a share, or $1 billion in all. The agreement sets a reverse termination fee of $60 million.
It runs the other way from a termination fee: the buyer pays the target.
Then antitrust approval is still missing at the outside date, and one side ends the agreement.
If the agreement lists that case, Woodgrove pays Litware the $60 million. That's 6.0% of the deal value.
When the buyer pays it
The agreement lists the cases, and they are the buyer's risks. Common ones:
- Regulatory failure
- The deal ends because a required approval isn't obtained, in a case the agreement lists. For example, the outside date passes before approval.
- Financing failure
- The deal ends because the buyer's debt financing doesn't fund. Many private equity agreements cover this case.
- Buyer breach
- The buyer doesn't close when it's required to.
A refused approval or failed financing doesn't trigger it on its own. The agreement sets the conditions. It often requires the agreement to end for that reason first.
Why deals have one
Before 2005, private equity deals usually had a financing condition. With one, the buyer could refuse to close if the debt didn't come through.
As competition among buyers grew, targets pushed them to take on more of that risk.
Reverse fees became a way to compensate the target if the financing failed. A limited guarantee from the fund backed them.
Deals with a strategic buyer can have one too. There, a fee owed when regulatory approval fails puts part of the regulatory risk on the buyer.
How big reverse termination fees are
About 69% of deals have a reverse fee.
The median is 3.8% of transaction value and the mean 4.0%. Fees range from 0.2% to 9.2%.
These figures cover 123 deals for US public targets announced in 2024, each with a transaction value above $50 million and a disclosed termination fee.
With financial buyers the median was 4.8% of transaction value. With strategic buyers, it was 3.5%.
Where a deal had both fees, the buyer's was larger in 81.2% of cases.
What it means for shareholders
The fee goes to the target company. Shareholders don't automatically receive a payment.
In many private equity deals, the fee also caps what the fund owes when a deal doesn't close.
Whether the target can ask a court to make the buyer close is a separate question: specific performance. The agreement and the court decide it.
On Tracking Alpha
The Buyer fee column shows it as a share of the deal value. The checklist shows the dollar amount.
When the agreement sets more than one, the list shows the largest.
Its dot among the protections is solid when the filings state one, and faint when they don't.
- Reverse fee 6.0% of value
- No reverse fee in the filings
How it is worked out
Reverse fee % = reverse termination fee ÷ deal value
Worked examples
Examples, with made-up numbers
One fee
Deal value $1.0B, reverse termination fee $60M.
- 60 ÷ 1,000 = 6.0%
A fee for each case
Deal value $3.0B. The buyer owes $90M if antitrust approval fails, and $150M if its financing fails.
- Regulatory failure:90 ÷ 3,000 = 3.0%
- Financing failure:150 ÷ 3,000 = 5.0%
- The Buyer fee column shows the largest:5.0%
Beside the target's fee
Deal value $1.0B, termination fee $30M, reverse termination fee $60M.
- Target fee:30 ÷ 1,000 = 3.0%
- Buyer fee:60 ÷ 1,000 = 6.0%
Easily confused with
- Termination fee
- Paid the other way, by the target to the buyer, in the cases the agreement lists. A common one is the target leaving for a superior proposal.
- Specific performance
- A court order to do what the agreement requires, not a payment. The agreement sets which remedies the target has and how they relate to the fee.
Questions
What is a reverse breakup fee?
It's another name for a reverse termination fee. The buyer pays it to the target if the deal ends in a case the agreement puts on the buyer. Examples are some regulatory or financing failures.
How big is a typical reverse termination fee?
For US public targets in 2024, the median reverse fee was 3.8% of transaction value. With financial buyers, such as private equity funds, it was 4.8%.
Who receives a reverse termination fee?
The target company. Shareholders don't automatically receive a payment from it.
Sources
Tracking AlphaBy Jera Value · Reviewed
Related terms
- Termination feeThe fee the target pays the buyer if the agreement ends in one of the cases it lists. Typically, the target ends the agreement to accept a better offer from another buyer.
- Specific performanceThe target's right to ask a court to order the buyer to complete the deal, instead of only collecting a fee or damages.
- Deal valueThe total value of the deal as the companies state it when they announce or revise it.
