We’re Exclusive…For Now – How M&A Exclusivity Agreements Work for Sellers

You’ve listed your business for sale on Acquire.com and within a few hours, your inbox has filled to the brim with buyer requests for more information.

You’ve responded to a promising buyer, completed an NDA, and they’ve sent your first letter of intent (LOI). 

But wait. As you review the terms of the LOI, you notice something called an exclusivity clause. It probably says something like, “You are not allowed to entertain other offers for 60 days.”

I thought they wanted to buy my startup – what do they need 60 days for? you might wonder. 

Don’t be put off. Exclusivity clauses are common in mergers and acquisitions (M&A) – sometimes for as long as 120 days.

Many buyers, especially larger ones like private equity firms, professional buyers, high net worth individuals, and investment banks seldom negotiate without one.

(Check out our article on how to evaluate potential buyers here.) 

To attract these larger buyers, you’ll need to sign an exclusivity agreement assuring them you won’t look at other offers while they perform checks like due diligence

However, before agreeing to exclusivity, you should consider how it impacts your goals. 

If you’ve read our blog on negotiating letters of intent, you’ll know that everything in an LOI is negotiable, including exclusivity, which is typically the only binding part of the agreement.

Here’s what you need to think about before negotiating an exclusivity agreement today.

What Is Exclusivity in M&A?

An exclusivity clause or agreement, sometimes called a no-shop clause, is a period in which you agree with a buyer not to talk to other buyers. During that time, as a seller, you can’t solicit, entertain, or encourage offers from other buyers except the one in the agreement.

If “entertaining an offer” seems broad, that’s because it is. Unless you specifically negotiate the terms of your exclusivity agreement, these agreements legally nix every aspect of talking about acquiring your business with other buyers.

We do our part to make sure you stay compliant in these scenarios. Acquire.com has an exclusivity feature built-in that makes your business uncontactable after you’ve accepted an LOI and are “under offer.”

Who Usually Asks for Exclusivity Agreements?

Your last significant other aside, larger buyers like private equity firms and big tech companies almost always require some kind of exclusivity period. At the amount of money they are willing to offer, buyers want time to weigh their decision and look into your business.

Smaller buyers (under $1 million) may ask for an exclusivity agreement too. We advise you to be careful about accepting long agreements if buyers are in this price range as they usually aren’t necessary.

How Long Are Exclusivity Periods Normally?

Most M&A advisors will tell you that the usual length of an exclusivity agreement is between 30 and 60 days after signing the LOI. They can go up to 120 or more days in extreme cases. The exact period will be specified in the LOI.

While as a seller you always want the shortest period possible, it’s possible to agree to a longer exclusivity period and get out early. If you want to manage your LOI like a pro, you can work with an M&A advisor to create deal points and contingencies that will inevitably end up in the PA (purchase agreement). These “contingency clauses” allow you to get out early and entertain other offers if buyers don’t meet certain benchmarks at various intervals of the agreement. For example, they take longer than agreed to perform due diligence.

Why Enter Into an Exclusivity Agreement?

Generally speaking, exclusivity agreements are more for buyers than sellers. You only need to put up with them if you believe the money at the end of the deal is worth the wait. Most larger businesses will refuse to perform an acquisition without one.

Benefits for Buyers

For the serious buyers willing to go through an expensive acquisition (the kind you probably want to work with) the process of acquiring a business costs time and money.

Before an acquisition, a buyer will usually need to do things like:

  • Hire lawyers and advisors,
  • Draft purchase documents,
  • Draft debt-financing agreements,
  • Set up meetings between you and their integration teams, and
  • Perform due diligence (some due diligence processes can reach hundreds of thousands of dollars!)

Remember that buyers want to spend as long as possible in exclusivity. The longer they stay, the deeper they can dig into due diligence. Long exclusivity periods also minimize the pressure to buy your business before another buyer comes knocking at the door. That can work to your disadvantage, too.

Benefits for Sellers

As a seller, there are few benefits to entering lengthy exclusivity agreements. They’re usually intense periods of responding to questions about financials and meeting with tax advisors, lawyers, and integration teams. 

Exclusivity periods are simply a necessary part of securing the best buyers for your business. However, they also mean buyers can’t bid on your business, which may result in a lower purchase price.

Your goal as a seller is usually to secure as short an exclusivity window as possible while still making your buyer happy. If played right, an exclusivity window can add the needed pressure on buyers to close the deal before you start entertaining offers from other buyers. The only downside of a short window is that your buyers may try to cram in as many meetings with your team as possible during the time allowed.

How an M&A Advisor Can Help Manage Your Exclusivity Agreement

If you know you have a winner of a business and want to secure the best purchase price, you need to learn how to play ball with the pros. The best buyers will easily get ruffled if you are not willing to play on their terms or speak their language.

This is why it can be helpful to bring on an M&A advisor in any acquisition. They can advise you on exactly how to structure your agreement so a buyer knows they’re dealing with a founder who knows their stuff. That usually means more money left on the table. 

An advisor can also keep track of fine print in your agreements and set exit points. That way you know you’re staying competitive and on your timeline, not theirs.

Want to sell with confidence? Check out our M&A advisor directory for one-off professional assistance or if you’re a larger SaaS business that wants a white-glove done-for-you service, check out our Managed by Acquire service created specifically to help larger startups get acquire’d.

The content on this site is not intended to provide legal, financial, or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before entering into any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.

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