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.
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.
"The entire process went smoothly and professionally. The BTS team kept me fully informed at every step. They worked hard and were effective in bringing the deal home."
"Skip and I continue to be grateful for all you have done to make the sale of Pure Flow come to fruition."
"BTS’s level of expertise in the process and close attention to detail enabled us to successfully navigate the deal."
"These types of transactions are often long and complicated and I doubt it could have been successfully completed without your close ongoing involvement."
"The outside objective point of view that you have brought us has been invaluable as we prepare for the rapid growth."
"John then found the right buyer and coordinated a seamless transition—he doesn’t miss a single detail."
"John immediately identified our strengths and experiences and discussed a business that ultimately was more in line with our goals."
"The BTS team came in, evaluated everything in a professional and thankfully non-threatening manner."
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Precision Machining Company
Initially, liquidation was a serious consideration. It would offer a quick exit but would hurt loyal employees and disrupt the customers who had come to rely on its quality production.
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