Virtually every M&A deal has a buyer exclusivity period meaning that the seller agrees to discontinue marketing and to stop actively looking for buyers. This is also known as “no shop” period during which the seller agrees to exclusively court the selected buyer preventing their soliciting, negotiating or entering into agreements with other buyers. There are good reasons for this but sellers need to be aware that there are some risks to be managed during this period.
The more competitive the deal, the more buyers want exclusivity. Naturally buyers want to protect and secure their interest, agreed indicative deal terms and to improve their likelihood of closing. Buyers also do not want to have to contend with late counter offers. In deals where the seller has enough leverage they can resist the need for exclusivity however, this may cause buyers to back away. Most buyers aren’t willing to spend the time and resources if there is little certainty of closing the deal. As such, it’s pretty uncommon for mid-market M&A deals to not have a period of exclusivity.
Buyer exclusivity periods range from 30 to 90 or even 120 days with 60 days typical. A 60 day period provides ample time to complete due diligence and prepare deal documentation for most mid market businesses. The exclusivity period generally commences when a letter of offer, including “no shop” terms, is accepted by the seller.
The offer may or may not be binding however the exclusivity as well as confidentiality clauses are most certainly binding. The exclusivity period may be extended by mutual agreement or by using automatic extensions.
The biggest risk to the seller is where the buyer does not move things forward and does not act in good faith to complete the deal. As a deal progresses, it may become clear that it won’t close. Unfortunately the seller has to wait out the exclusivity period unless the buyer agrees to terminate. Generally those buyers with integrity will agree to early termination as in many instances the deal is called off or goes quiet due to unrelated issues.
M&A Break Fees & Deposits
There are several ways of sellers mitigating exclusivity risks. The easiest is to have execution milestones included in the offer letter. This ensures that the buyer completes specific activities within agreed times and that the deal progresses.
Break fees and non-refundable deposits can be used to reduce risks of a buyer not acting in good faith, walking away or prolonging closing. They typically only apply once deal terms have been thoroughly negotiated and significant due diligence completed. Break fee payments may however apply to both buyer and seller adding further negotiation complications. To ensure payment, break fees can be placed in escrow or bonds issued. Determining which party is responsible for a deal breakdown can also be extremely challenging, often ending up in court. Due to their complexity and negotiating challenges, break fees and deposits are rare in midmarket deals.
Before sellers enter into an exclusive deal, ensure that all buyers have been fully explored and the seller has the best offer on hand. The balance of power changes dramatically as soon as the seller grants a single buyer exclusivity and it is very important to be confident that a deal can complete with the selected buyer.
It is however also important to keep the door open and communicate with excluded buyers of interest. Advise them that you are in negotiations with others and request that the stand by. Keeping options open helps if a deal falls over and sellers want to recommence negotiating. Seeking to re-ignite interest of former prospective buyers may however prove difficult as they may have moved on or are jaded by the previous dealings.
Having an experienced M&A intermediary and attorney review a letter of offer is key to ensuring exclusivity clauses are fair and balanced. The earlier they get involved generally the better the outcome with far fewer “issues” needing to be negotiated or renegotiated which could put the deal at risk.
It is also important to note that exclusivity does not mean providing unlimited access to information and IP! The seller still controls what when and how information is disclosed. The seller must continue “business as usual” and protect the business and IP right up to completion.
Buyer exclusivity in M&A deals is normal and typically not an issue. As with all elements of M&A, common sense, simple deal structures and negotiating between trusting parties reduce risks while improving deal certainty.