We're in the middle of selling our manufacturing business and the LOI includes an exclusivity clause. I'm trying to understand what's typical and what's overly restrictive. The buyer wants 120 days where we can't talk to anyone else, and there's a clause saying we can't even respond to unsolicited inquiries. Is this standard? We don't want to kill the deal but 4 months feels like a long time to be completely locked in with one buyer. What should I be looking out for in the fine print?
Exclusivity
The fine print of exclusivity clauses in M&A contracts
120 days is on the long side but not unheard of for a deal that needs regulatory approval or significant diligence. The real issue is the no-shop plus no-talk combined. If the buyer is slow-walking diligence, you have zero leverage. Push for a shorter initial exclusivity, maybe 60 days, with a defined extension only if they've met specific diligence milestones.
We signed one that had a 90-day exclusivity and a fiduciary out. That out is critical. If a better offer cmes in unsolicited, the board can engage and terminate exclusivity without breaching. Without it, you're stuck. Have your lawyer insist on it.
If you're in manufacturing with real assets, be careful about the 'no solicitation' definition. Some buyers define solicitation so broadly that any casual conversation at an industry event could be construed as a violation. Make sure it's narrowly drawn.
120 days is four months. That's a lot of opportunity cost. I've seen deals fall apart at day 110 and the seller is back to square one with no backup options because they stopped returning calls months ago.
Is the buyer a strategic or a PE firm? Strategics sometimes move slower due to internal approvals. PE tends to be more predictable but they'll push hard on the no-shop because they don't want to lose the deal after spending on diligence. Worth asking who actually signs off on their side.
Don't overlook the termination fee. Some exclusivity clauses have a reverse breakup fee if the buyer walks, others don't. If they want 120 days of your undivided attention, they should have some skin in the game. A deposit or break fee keeps them honest.
We had a 120-day exclusivity and the buyer ended up lowering their offer by 15% after diligence. We had no leverage because the clock was running and we had no other bidders. Lesson learned. Now I'd never sign more than 60 without a hard deadline and a firm price commitment.
Fine print often Includes a provision that the exclusivity survives termination of the LOI. That's a trap. If the deal falls apart, you shouldn't still be locked up. Make sure the exclusivity expires automatically if the LOI is terminated for any reason.
The reverse breakup fee point is interesting. Ours doesn't have one. I'm going to ask for a shorter window with milestone-based extension and a fiduciary out. Appreciate the specifics on the no-talk definition too, that's something I hadn't considered.