Break fee
A break fee is a payment one party agrees to make to the other if it walks away from a deal after a certain point without a permitted reason, usually to cover the other side’s due diligence and legal costs. In small business sales they are uncommon but sometimes negotiated for larger or more complex deals.
Most small business deals in Canada do not include a break fee. The concept comes from larger M&A transactions, where a party that spends significant money on due diligence wants some compensation if the other side backs out for reasons outside the agreed conditions. When a break fee does appear in a smaller deal, it is usually tied to a breach of exclusivity or a walk-away with no valid closing condition unmet.
How it is structured
A break fee is normally a fixed dollar amount or a percentage of the purchase price, payable within a short window after the deal collapses. It is not the same as a deposit, which the buyer puts up before closing, or a holdback, which is money withheld from the seller after closing. A break fee only becomes payable if a party breaches the agreement or terminates without cause.
What to watch for
Because break fees are negotiated, not implied by law, the exact triggers matter. A seller who wants to keep other options open should avoid agreeing to a broad break fee that penalizes ordinary changes of mind. A buyer who wants certainty should ask for one before committing significant due diligence spend.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Treadstone LawLegal commentaryConditions Precedent to Closing in an Ontario Business Sale Agreement
- 02Treadstone LawLegal commentaryBuying & Selling a Business
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