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In every case, buyers will only commit the resources necessary to conduct exhaustive due diligence once the seller agrees to an exclusivity period. During that time, the seller agrees not to talk with any other potential buyers. Exclusivity requirements are usually documented in the Indication of Interest (“IOI”) or Letter of Intent (“LOI”).
How long is an appropriate amount of time for an exclusivity period? Over the past 68 years, Chapman Associates has completed deals with various exclusivity periods. However, they are typically 60 - 90 days, even 120 days or more, in very complex situations. Sellers prefer a shorter period; buyers prefer more extended periods. Longer exclusivity periods give buyers, accountants, attorneys, and consultants more time to complete the Quality of Earnings Review (“QoE”) legal, financial, and operational due diligence and to draft the proposed purchase agreements. It also gives buyers the time to find reasons to lower their offers before going to the definitive purchase agreement. Shorter periods allow the seller to reengage with other buyers more quickly.
Regardless of the duration of the exclusivity period, we’ve found that sellers increase their chance of success by establishing specific milestones that the buyer must accomplish to retain exclusivity. While milestones and short exclusivity periods can give sellers more control over the process, it is essential to remember that an LOI is not a binding commitment to complete the proposed transaction. The buyer and seller can walk from the transaction at any time for any or no reason. As M&A advisors, we will manage that process to get you the best result.
Exclusivity periods can be daunting to owners of middle-market companies. So we advise sellers to delay entering an LOI until they have found a perfect-fit buyer with the motivation and capacity to complete the purchase promptly.
If you have questions about the M&A process for middle-market privately held companies, please call me at 407-580-5317. There is no charge for a consultation.
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