Exclusivity periods were common in pre-pandemic deals to help potential buyers safeguard against competing bids while considering an acquisition. However, these provisions have been dramatically restricted or eliminated entirely in today’s seller-friendly market, which leaves private equity and other buyers more susceptible to losing a deal.
The non-binding letter of intent is important in the sale of any business, setting out key transaction terms to which the parties have agreed to pursue and negotiate a deal. Although the letter of intent is largely non-binding, select provisions are binding, including the exclusivity provision, which establishes a particular period of time the seller will not engage in discussions with any other party about a transaction. This gives a potential buyer sufficient time to complete diligence and negotiate the transaction documents without worrying about another buyer swooping in and acquiring the target company. Longer exclusivity periods work to the advantage of buyers, while sellers tend to push for shorter periods.
Thirty- to sixty-day exclusivity periods were typical 18 months ago; now, exclusivity periods in competitive deals are often limited to a handful of days or eliminated completely. When multiple bidders are vying for the same target company, sellers are hesitant to select a single bidder too early for fear of missing out on a better deal that may be negotiated with another bidder. In these situations, sellers will often leverage this competition to demand reduced or eliminated exclusivity periods. Without an exclusivity requirement, sellers are free to negotiate with multiple parties at the same time. Alternatively, sellers could elect to negotiate with a single bidder but know they may terminate negotiations and move on to another bidder at any time without being tied to the prior bidder.
Bidders who understand this competitive trend should complete most of their diligence and other work prior to the bid date to put their best foot forward. Prepared bidders who are able to close on a shorter timeframe will generally have a key advantage over others. Early completion of diligence may even put a bidder in a position to make a preemptive bid in an attempt to take the target off of the market before bids are officially due. Nevertheless, it is still in a bidder’s best interest to negotiate a short exclusivity period.
Sellers involved in less competitive deals may not have sufficient leverage to eliminate the exclusivity period, but they can still push to shorten exclusivity as much as possible. One way to do this is to ask for an exclusivity period tied to particular milestones. For example, a seller could agree to a 15-day exclusivity period that would automatically be extended if the buyer has delivered a purchase agreement reflecting the key terms of the letter of intent before the exclusivity period expires.
This mechanism keeps a potential buyer engaged in the transaction while also allowing the sellers to move on to other bidders. Exclusivity periods will likely reappear if the market shifts away from a seller-friendly environment.