The Month You Agree to Be the Only Seller in the Room

Expect to grant it. Negotiate how long, and what happens at the end.

Exclusivity, also called a no-shop, stops you talking to other buyers for a defined period. A buyer about to spend real money on accountants and lawyers will ask for it, and the ask is reasonable. No buyer will fund an investigation while competing with three other parties.

What you are actually signing is the moment the field disappears, and everything that happens afterward happens inside that fact.

Why the field is the whole protection

Before exclusivity you have several parties, a comparison, and a reason for each of them to move.

After it you have a counterparty, a clock, and nothing to measure their behavior against. When their investigation produces a finding and somebody asks for less money, your position in that argument was fixed weeks earlier by a document. If three other parties were reading the same material last month, the request is a negotiation. If there were never any others, it is an invoice.

So the terms agreed at this stage, rather than the ones argued later, decide how much room you have.

Read which parts bind you

A letter of intent may be binding or non-binding, in whole or in part, and which it is depends on intent and wording. The same is true of a term sheet and of an indication of interest. The words at the top of the page tell you nothing about what you have agreed to.

So the first question about one of these documents is not what it offers. It is which of its provisions you are bound by.

A common shape is that price and terms are expressly non-binding while exclusivity, confidentiality, expense allocation, and sometimes a provision about walking away are binding. Written that way the asymmetry runs one direction: the buyer can reprice after their investigation, and buyers do, so you have taken your company off the market and the buyer has taken on an intention.

It is not always written that way, and the variations cut both directions. A letter of intent can bind the price. It can be drafted to bind almost nothing. Elements get left out deliberately, by either side, to keep room the other side believes has been closed. A document that looks more definitive is not therefore more binding.

How long, and tied to what

The buyer’s investigation usually runs around ninety days. It can be shorter or longer depending on the buyer, the structure, and how ready your records are: a company whose numbers have already been recast and tie to the financial statements moves faster than one assembling them while a buyer waits.

Your exclusivity period should cover that work rather than exceed it. Size it to that work, and make any extension depend on something the buyer has delivered, not on a date passing.

A buyer who has not produced a request list inside the first stretch of their own exclusivity is not working. They are holding your company still while they make up their mind. An extension a buyer has to earn is an extension you are able to decline.

There is no deposit, and you should not ask for one

What a seller is paid for exclusivity is not money held in escrow. It is a shorter clock and a tighter set of conditions, and both are worth considerably more.

A deposit is a number that gets argued about and, in the end, returned. A condition that names what gets verified and against what is a term that still exists in month three, when somebody is deciding whether your price moves.

The conditions are where a price goes to die

Three things decide whether a repricing is coming, and all three are settled before you sign.

How specific the conditions are. A condition that reads “satisfactory completion of due diligence” is met whenever the buyer decides it is. Name what gets checked and what it gets checked against, and the condition becomes something you can hold them to.

Whether the buyer has already seen the thing they will later say surprised them. A recast that ties to the financial statements, in the buyer’s hands before the letter of intent, removes most of the available room.

Whether anybody else is still in the room, which is this chapter.

So the question to ask, in one sentence: what specifically has to be true for you to close at this number?

Ask the uncomfortable questions first

Every uncomfortable question you decline to ask before signing becomes a discovery the buyer gets to make during a period when you have no alternative.

Can they actually pay, and with what. Who inside their organization has approved this. Is the financing committed from a named source or merely indicated. What do they intend to do with the management team in the first year.

None of those get easier to ask after you are exclusive. All of them get cheaper to answer before.

What getting it wrong costs

Exclusivity granted on the buyer’s conditions, with no end date and a diligence condition only the buyer can satisfy, is not a deal. It is a free option on your company for as long as they like, paid for by taking the company off the market.

And if it ends without a close, the cost is not the time. It is that the other credible parties moved on while you spent it, and that a buyer, their advisors, and their lenders now know what the investigation turned up. Whatever you run next starts from there.

More on this: The Document That Ends Your Negotiating Position; The Buyer Wants Less Money Now. Ask These Four Questions..

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This is what we do. Prism Edge gets the hard questions answered before exclusivity is granted, writes the period to the length the work requires rather than the length the buyer requests, ties extensions to the buyer having actually done something, and replaces open-ended conditions with ones that name what gets verified. That is the difference between a negotiation in month three and a concession.

The full chapter on developing the proposal is in The Business Sale, free to download here.

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General information, not legal, tax, or financial advice, and no advisor relationship is created by reading it. Rules change and the specifics of your situation matter. Always consult your own attorney and accountant before acting.