Company before doing any deal negotiates break fee and reverse break fee, which is a kind of deal protection mechanism.
In August 2014, the Tim Hortons a fast food chain in Canada was bought by Burger King Worldwide Inc(NYSE:BKW). to become world's major restaurant group. The two companies are now a combined venture by the name of Restaurants Brand International, working under Jorge Paulo Leman a billionaire of 3G Capital.
When Burger King Acquired Tim Hortons, they made an agreement containing $345 million break fee and $500 million of reverse break fee. North of these amounts are in excess of 2013 gross domestic product (NYSEMKT:GDP) of Micronesia and Tonga. The break and reverse break fees in United States are usually in million so these amount s are not too large. These fees' might have major consequences so it should be carefully negotiated and scrutinize like any other part of the agreement. The LSE received a break fee of exact $10 million from TMX Group when their deal of merging the companies failed. AT&T paid break fee for nearly $4 billion to T-mobile.
Break fee usually means an amount, which is paid to the buyer by the seller if the planned deal got cancelled by the seller. Break fees are normally agreed to mutual consent by the seller. These fees are usually used to endorse sureness of a agreement or a deal by penalizing the party for cancelling on the deal, and are required to reimburse the other party i.e. buyer for the extra expenditure it made. The amount of break fees are usually in fixed dollars and are general based on a certain percentage of seller equity value. For instance, in the deal of Burger King and Tim Hortons break fee of 2.7% of the Tim Horton's equity value was set. However, it can also be set on the total enterprise Seller value, which means both equity and debt.
On the other hand, reverse break fees are opposite to break fees, as it is a fee paid to the seller by the buyer failed to complete the deal. It is also in fixed dollar amount and paid to seller to compensate his loss related to the deal like loss of reputation and cost incurred to deal. The damage is more to the selling party if the deal did not happen so reverse break fees amount is always higher than the break fees.