We are entering late-stage negotiations and want to ensure the buyer does not walk away at the eleventh hour after we have exposed our proprietary operational secrets. How do we structure a reverse break-up fee in the LOI to cover our operational risk and transaction costs?

Question

Tyler Smith · Accepted Answer

Exposing your business to a buyer during due diligence is highly risky. You are sharing proprietary processes, customer lists, and financial data. If the buyer walks away late in the process, you have paid a massive dumb tax in the form of legal fees, lost productivity, and exposed secrets.

To protect your business, you should negotiate a reverse break-up fee in the Letter of Intent. A reverse break-up fee requires the buyer to pay you a specified amount if they walk away from the deal for reasons other than a material breach by you or a failure to meet clear closing conditions.

Typically, these fees range from two to five percent of the enterprise value. While they are more common in larger transactions, you can negotiate a simplified version that covers your actual transaction expenses and a pre-determined amount for operational disruption if they fail to close.

To secure this, propose the fee during the initial LOI negotiations when your leverage is highest. Frame it as a mutual commitment: just as you are agreeing to exclusivity and taking your business off the market, the buyer must prove they are serious by putting real capital at risk.

Use your structured Thinking Time to define your walk-away points. If a buyer refuses to agree to any form of break-up protection, it is a clear signal that they may be fishing for information or plan to re-trade the deal later.