A deal-ending friction penalty incurred by a party for withdrawing from an agreement, intended to serve as a deterrent by inflicting significant financial harm.
That is, the seller wants the deal to happen, so the buyer pays a big fee if it doesn’t.
Why might this happen? Like...Shmoogle (a behemoth) wants to buy Shmeikle (a tiny company). Both are in the same industry, but Shmeikle is worried that the Justice Department might outlaw the sale based on Sherman Act/anti-monopoly/anti-trust rules. Having “sold out to The Man,” Shmeikle’s business would have been harmed, as its distribution network of hippies would have all viewed the company differently...than the hippie hipster image it held before selling out. So they needed to have enough cash from Shmoogle to make up for the damage.
See also: Alimony. The ironically named “Two Girls, One Shuck Co.” is an oyster catering company that employs hundreds of women serving thousands of bi-valves each year. In an effort to diversify, the company enters an agreement to purchase Mike’s Mussels, Inc.
The girls’ lawyer, Dr. Ernie “Big E” Ville, insists on including a provision with a breakup fee of one million dollars to dissuade Mike from wasting their time by looking around for a more attractive suitor.
Related or Semi-related Video
Finance: What is a Breakup Fee?1 Views
Finance a la shmoop... what is a breakup fee? Isn't this what Taylor Swift wanted [Taylor Swift on the red carpet]
to charge the Biebs or was that the weekend and what were mr. and mrs.
weekend thinking when they named him The anyway..wait is this supposed to
be about Selena and whatever maybe not well in corporate suitorship there's
the same kind of you know tit for tat that is cantaloupe wants to acquire [Cantaloupe and a grape appear]
grape for a hundred million bucks but cantaloupe is worried that grape will
want to sew her seeds with you know other suitors there's the watermelon
wuzzle the pumpkin press and the squash squash well cantaloupe feels like it's [Cantaloupe with $100m]
paying a full price in the hundred million dollars it has offered but it's
worried about idiots meaning everyone who doesn't agree with it or isn't
aligned with cantaloupe yeah they're by definition an idiot according to [Man holding out a cantaloupe]
cantaloupe well that is a financially irrational other suitors who might want
to pay a hundred five million or a hundred ten million or a hundred fifteen
million dollars so as part of the term sheet that gives grape thirty days to[Term sheet appears]
fully sign or commit and be done well, grape has to pay cantaloupe a breakup
fee if grape decides to go with someone else who wants to buy her that breakup
fee is a fee for breaking up the deal between cantaloupe and grape and it
might be something like 10 percent of the deal and this is really important
because then if pineapple wants to buy grape [Pineapple appears with cantaloupe and a grape]
well pineapple will not only have to pay meaningfully more than the hundred
million dollars of cantaloupe but it'll have to pay grape the breakup fee as
well making the total cost of the deal the pineapple well you know pretty
prickly...
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