A breakup fee is inserted into an acquisition agreement to prevent the seller from backing out of the deal. If the seller does so, it must pay the breakup fee to the acquirer. This fee is intended to compensate the acquirer for the time and money it has spent to research the deal, conduct due diligence, and prepare legal documents. The fee can be as much as 3% of the deal value.
The fee is also useful for preventing the seller from shopping for a better deal. If the seller were to do so, it would need to find an offer that exceeded both the original buyer's price and the amount of the breakup fee. When other prospective buyers know that a breakup fee exists, they are less likely to make competing bids for the seller.
A reverse breakup fee is paid by the acquirer to the seller if the acquirer chooses to back out of the deal. This situation usually arises when the acquirer cannot secure funding to close the deal.