Break Fee. The lender will put resources onto closing and funding a transaction. In exchange they may ask for a break fee or no-shop clause to encourage the company’s focus on the deal at hand.
Nobody likes wasting time working on a deal that won’t happen. Break fees help the lender by qualifying borrower interest and preventing endless deal shopping. I have been burned by companies who sign a term sheet in order to force another party’s hand. Maybe it is to extract better equity terms from the investors, maybe to show another lender that they need to sharpen the pencil. Whatever the reason it’s no fun.
But I’m not a fan of break fees. Most companies are earnest in their desire to get a deal done and I’d rather not assume everyone is going to be guilty of bad behavior. It is not a great way to start a relationship. For that reason we don’t have a break fee in our term sheets at CLP. If we see a rash of broken deals we might revisit this but I can’t see that happening.
A break fee is meant to compensate a party for their time spent. If you do agree to a break fee keep it in that range.