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What to expect in the LOI exclusivity period

A question that often emerges when reviewing proposals for acquisition with owners is the exclusivity period.

Most Letters of Intent contain a “no shop” phase of 60 to 90 days where ownership and advisors are prohibited from formally seeking other interested parties or entertaining any other offers.

Why agree?

First, it gives the buyer time to conduct the thorough diligence that is needed, to dive deeper into data to make sure the acquisition is a good fit, and to get a more complete understanding of the customer base and the company’s market position.

In the lower mid-market, this can include close financial review and even a “quality of earnings” analysis, much like an audit. The study is generally commissioned to an outside accounting firm at the buyer’s expense.

This is costly and takes time.

Second, exclusivity gives the buyer time to prepare a definitive agreement. This involves retaining a law office to draft the documents and related schedules which will paper the agreement and be signed by both parties. Once it begins, it represents a significant investment in the deal.

Third, it is a time for the buyer to formalize financing. This can include senior bank financing, among other tools used to achieve the acquisition price. If the buyer is a private equity fund or a strategic buyer, it is likely they will already have a line on funding.

Exclusivity is all about addressing risks.

For the buyer, the no shop period provides assurance that the time and money invested will not be wasted because an owner decides to take a different deal mid-stream.

For the seller, it means the buyer is serious and isn’t on a fishing expedition for something better.

The intermediary keeps tabs on the schedule to make sure the process is progressing as anticipated, and if not, to find out what is needed to get things on track.

Most exclusivity periods are between 60 and 90 days, sometimes as long as 120 days. Among the best ways to minimize the period is to assemble information that will be needed in advance. The intermediary will provide a list. A good strategy is to assemble this in advance.

We try to pre-load this into a data room, and can flick a switch to provide the buyer immediate access to data after the LOI is signed. This saves time and generally includes most commonly requested data points.

Be aware - a major reason for no shop periods to go beyond the original timeframe is the time it takes sellers to assemble diligence materials.

There is a chance that a buyer will use information gained through a quality of earnings analysis to attempt to re-trade the deal. This translates into adjustments, such as a price reduction or different terms. It happens, and is in fact a strategy for some buyers.

The best protection is to have clean financials and good processes in place. Also, the  intermediary can be a buffer.

A seller can check a reference, and see how other transactions were handled by the buyer. You want to make sure your interests are in alignment. Consider integrity, personality and financial capacity, as well as their long-term goals.

Although the exclusivity period can be a cause for concern, it is necessary to get a deal to the finish line.

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