Ask any private equity firm or strategic acquirer about their thoughts on exclusivity and they will say it is absolutely essential in order for them to move forward on any transaction. Their main argument being that since they are spending a significant amount of money and resources to get the deal closed they have indicated a high level of commitment to moving forward and thus do not need any incremental risk added to the process. Many companies and advisors quickly buy into this argument and grant 60 – 90 days of exclusivity.
However, when the seller grants exclusivity, they negate the single biggest source of leverage they have: being able to negotiate with other buyers. I like to say that nothing good happens after you grant exclusivity except for the deal closing. Many times, as soon as the seller grants exclusivity, diligence slows down and the buyers are more entrenched in their negotiating position, sometimes “re-trading” (changing) the terms. Many private equity and strategic buyers view exclusivity as a free option on a deal.
As a seller, you should not automatically assume that you will need to grant exclusivity. We have been successful in removing exclusivity in many transactions. When a non-exclusive process is maintained, buyers continue to compete on price and timing. Also, keeping more people in the process improves the probability of a successful transaction.
However, if you do decide to grant exclusivity, don’t allow more than 30 days. If the buyer has completed all their business and industry diligence they should be able to complete confirmatory legal and company diligence along with the deal documents in that time period. Additionally, if you keep it to 30 days, there is still a good chance you can go back to other buyers if things don’t work out. However, if you grant 60-90 days it will be difficult to re-engage other parties.
In addition, I highly recommend building in milestones that the buyer must hit during the 30 day exclusivity period. If they don’t hit these interim dates, you can terminate the exclusivity early. Sensible benchmarks include:
- Deliver purchase agreement / investment documents within 7 days
- Complete an initial turn of the documents within 14 days
- Complete all material business and legal diligence within 20 days
- Receive board approval within 25 days
Don’t enter into exclusivity too easily; it is a great source of leverage and you need to maximize its impact.