Answers / M&A Advisory

What are the key considerations when drafting a reverse termination fee provision in an M&A agreement, and how do you advise a client on the appropriate fee amount?

A core M&A Advisory interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

The reverse termination fee compensates the target if the acquirer fails to close due to financing failure, regulatory denial, or breach. Key considerations: the trigger events (e.g., financing failure, regulatory), the fee amount (typically 3-5% of equity value for cash deals, higher for stock deals), and the exclusivity of remedy (i.e., no specific performance). I advise clients to align the fee with the target's damages (e.g., lost premium, disruption) and the acquirer's risk of non-closing.

WHAT INTERVIEWERS LISTEN FOR

  • ✓Trigger events: financing, regulatory, breach
  • ✓Fee amount: 3-5% of equity value
  • ✓Exclusivity of remedy vs specific performance
  • ✓Align with target's damages and acquirer's risk

COMMON MISTAKES

  • ✗Setting fee too low to deter walkaway
  • ✗Allowing specific performance without cap

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