The line from an informal to a formal agreement is crossed when penalties are assigned for failure to reach a final agreement. For instance, if a company desires to be acquired and attains a letter of intent from an acquisition suitor, a term is placed within the LOI identifying a fee due to the acquiree should the acquirer fail to meet the stated deadlines or step away from the deal. Depending on the risk, market environment, and size of the deal, the penalty can range up to 7 percent of the deal, or be assessed as fees from several thousands to millions of dollars.
General speaking, deal break fees are assigned by the type of partnership agreement. Licensing and distribution break fees are usually determined to be worth 3 to 12 months´ of worth of estimated royalties. Joint development break fees ranged from 7 to 12 percent of the total value of the development project. In both situations, the fee is large enough to cover lost sales due to a potentially profitable partnership with another firm. Marketing break fees cover up-front program costs or are amortized over the course of the intended campaign. This is usually invoked only when the program has been halted for some reason.
Acquisition and investment break fees are based upon the opportunity cost associated with market conditions. This set figure is augmented with a percentage of the estimated final acquisition price. In one instance, the break fee was established at $300,000 or 3 percentage of the estimated deal value of $10,000,000. This deal break fee stood unchanged, even though the deal was ultimately closed at over $11 million.
General guidelines exist for different industries, but this is based not on a table, but experience within an industry. If you are new to creating a partnership, ask your accountant, attorney or better yet, someone who has done deals within your sector. If you don´t have break fees or terminology associated with your agreement, think long and hard about creating one in the first place. Since it´s like a marriage-you hope for the best and plan against the worst case scenario. But if it doesn´t work out, the break fees cover your costs, and allow a relatively clean get-away from a bad situation.