By Natasha Dinneen
A period of exclusivity is usually given after a final offer from a buyer or investor has been accepted, following a competitive M&A or growth capital fundraising process involving discussions with a number of parties.
Does exclusivity mean the deal is done? Unfortunately, not…
What happens next is a period of due diligence enquiries and negotiation of legal agreements that turn the agreed offer into a completed deal.
Exclusivity in the context of an M&A or growth capital transaction is when the buyer (or investor) and seller agree to only talk to that one party to the exclusion of others. Meaning the buyer (or investor) and seller enter into one-on-one discussions, and legally agree to switch off all conversations with other potential buyers and investors. Typically, this happens when both the buyer (or investor) and the seller decide that they are well suited to each other, agree on the headline terms of the deal and both intend on closing the deal as quickly as possible.
Entering exclusivity can be a huge decision for our clients. What if the partner you chose ends up being the wrong one? What if they renege on the deal terms and chip the price when you have no other options left? Will it be too late to go back and speak to the others? What if there’s a better offer out there that you missed by going exclusive? How will others view it if you do go back? It can be a very emotional decision, as well as a practical one.
Exclusivity usually begins on acceptance of a Letter of Intent (LOI) from a buyer (or investor) or agreement of Heads of Terms for the deal. Legally binding terms in these documents will include a specified period of exclusivity ranging from a few weeks to a few months. We usually recommend to clients that they negotiate as many of the key terms in the LOI as possible before entering into exclusivity, to maximise the benefit of a competitive environment to get the best possible terms before committing to one party.
The time specified for exclusivity is often negotiated depending on the competition within a process, and the due diligence workstreams required to close the transaction.
Buyer vs. seller expectations during exclusivity
Buyers (or investors) typically will want to spend as long as possible in exclusivity as this means they can dig deep into due diligence, minimising any risks associated with being rushed into a transaction.
Exclusivity for sellers, on the other hand, is a very intense period of responding to detailed due diligence questions and having availability for meetings with lawyers, tax advisors, due diligence providers, integration teams and so on, so the shorter this period, the better. A shorter period also means less risk of news leaking out into the market or of a deterioration in the business environment.
The main advantage of exclusivity for our clients is more certainty of closing a deal within an agreed timetable. When there has been competition in the deal process before exclusivity, the buyer (or investor) has a strong incentive to close the deal before another buyer can come in and take the deal away from them when the exclusivity period has expired. A shorter exclusivity period also means that if the deal doesn’t work out, there’s greater likelihood that others will still be interested in doing a deal.
What to expect in exclusivity
Exclusivity with a trade buyer is often very different to exclusivity with a private equity investor. Typically trade buyers are much more focused on product and technology, customers and culture – i.e. synergies. Private equity investors on the other hand are typically very focused on the financial forecasts, market opportunity and what the future looks like at their exit horizon in 3 – 5 years.
At FirstCapital, we ensure that our clients are fully prepared for exclusivity. As part of our SMART process, typically we provide the following support during Transaction Close (i.e. the period of exclusivity):
- Project management of the timetable and key deliverables to transaction close
- Briefing on what questions and requests our clients should expect during due diligence and how best to address them
- Preparation and management of a virtual data room of information for due diligence
- Fielding questions and requests from buyers or investors and their advisors
- Preparation and review of presentations for meetings
- Commercial input and liaison with lawyers and other advisors for drafting of legal documents
- Preparation of the deal economics and analysis to model exactly who gets what financially out of the deal
- Negotiation with the buyer or investor on our client’s behalf.
This is a very intense period for all involved, and advanced preparation and prior experience makes a world of difference.