In an article published for the September 2021 issue of Mergers & Acquisitions, Lisa Hedrick details the changing usage of exclusivity period provisions in transactions as the competitive M&A landscape has shifted to a seller’s market.
Exclusivity provisions are binding aspects of a letter of intent that establishes a particular period of time the seller will not engage in discussions with any other party about a transaction, which gives a potential buyer more time to complete diligence and negotiate the transaction without worrying about another buyer swooping in and acquiring the target company. Longer exclusivity periods are advantageous for the buyers, while sellers tend to prefer shorter periods.
Whereas 30-to-60-day exclusivity periods were typical pre-pandemic, they are now limited to a handful of days or eliminated completely. “When multiple bidders are vying for the same target company, sellers are hesitant to select a single bidder too early for fear of missing out on a better deal that may be negotiated with another bidder,” Hedrick said. “In these situations, sellers will often leverage this competition to demand reduced or eliminated exclusivity periods.”
Eliminating the exclusivity period allows sellers to negotiate with multiple buyers at once or walk away from a single bidder’s negotiations at any point. To get out in front of the competition, bidders should complete most of their diligence and other work prior to the bid date to put their best foot forward.
For sellers who don’t have the leverage to eliminate or dramatically shorten the exclusivity period, another approach is to ask for an exclusivity period tied to particular milestones. “For example, a seller could agree to a 15-day exclusivity period that would automatically be extended if the buyer has delivered a purchase agreement reflecting the key terms of the letter of intent before the exclusivity expires,” Hedrick explained.
The full article is available to Mergers & Acquisitions premium subscribers here.
Stephanie A. Hood