M&A exclusivity is one major strategy utilized by many, but some are unaware of how to push its advantages to the limit. Starting a series of topics from his one-on-one client consultations, Domenic Rinaldi shares one conversation focused on exclusivity. He explains how this gives buyers the owners’ undivided attention and speeds up the entire purchasing process. Domenic also breaks down the most important tips for sellers in releasing their company from the market to make it exclusive. He discusses why sellers must always believe in karma and never push away exclusive buyers in favor of way better offers.

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How To Make The Most Out Of M&A Exclusivity

I’m going to talk about a topic that came up in a discussion I had with a buyer or client about exclusivity. For those of you who don’t know, exclusivity is something that many buyers look to put into an offer, a letter of intent that simply states that the seller won’t consider another offer while they’re engaged in due diligence. It is a reasonable ask and owners should be willing to give it. They might want to put some caveats on it rather than have it be open-ended. It’s an important item of an offer. I’m going to go through both why from a buyer’s perspective you should be asking for it and from a seller’s perspective, why you should be willing to give it but maybe put some guardrails around what it is.

This topic is the first of a number of topics that I’m going to cover on items that are coming up in my one-on-one consults with various buyers and sellers, lots of questions and different topics. I’m going to cover a bunch of these items that come up in a normal course of discussions with my clients. These will be on the shorter end but hopefully packed with some good information so that you can act on these if you’re in the middle of a deal. The last thing I want to mention is we’re going to be announcing some new service offerings specifically geared towards buyers. I’m excited about these new products and services that we’re going to release. As always, I appreciate you being here. Remember that we’ve got all sorts of free resources available on our website. Things that can help you avoid the common pitfalls and mistakes in deals. Go visit K2Adviser.com/resources. Thanks for being here. I hope you enjoy this show.

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As I had talked about in the opening, this topic of exclusivity came up in a discussion that I was having with a buyer or client. We were doing a quick consult. The buyer didn’t understand what exclusivity was. They thought they would be giving something up rather than gaining something. I had to do a quick education. While this may seem like a simple topic, it’s not because understand from a buyer’s perspective, owners don’t want to give up exclusivity. They don’t want their business taken off the market to have a discreet discussion with a buyer, especially if you’re not certain that this is the right deal for you or that you can get financing, any number of reasons. Sellers don’t want to miss what is a crazy hot market. It’s important to have this but understand that sellers don’t want it. Sellers, please understand that buyers need it because it gives them the confidence to go start spending money to do the deals.

M&A Exclusivity: Exclusivity gives buyers the undivided attention of the owner of a business.

I’m going to go through quickly what buyers should be looking for. I’m going to put on my other hat here and take it from a seller’s perspective so that everybody understands what both sides are thinking about. If you can understand where the other side is coming from, you’re going to have a much better negotiation. You’re going to get to a much better place. There are lots of competition in the sellers dictating the terms. Unfortunately, there are buyers that will do anything to get a deal and then all bets are off buyers. Exclusivity, knowing that you’ve got the deal under lock for at least some period of time is important.

It gives you a couple of things. One, you know you have the undivided attention of the owner of that business, which is important, hopefully, the advisors. You need to know that they’re not splitting their time between helping you get through due diligence after an offer is accepted and fielding other inquiries, maybe having meetings or even soliciting other offers. Knowing that you’ve got an owner’s undivided attention, they’re doing all they can to help you get through diligence and see if this is the right deal for you is important.

The other reason from a buyer’s perspective as this is important is you don’t want to start spending money if you have the risk that the deal is going to be taken out from underneath you because another buyer comes along and makes a better offer. You are going to spend money. I always recommend that buyers do some initial diligence themselves before they start bringing in their professionals but at some point in time, you’re going to have to bring in the professionals like a forensic accountant, an attorney, an advisor and maybe some specialists. Maybe there are regulations, HR or OSHA. You’re going to start paying people to help you do this diligence. The last thing you want to do is start cutting checks only to potentially have the deal fall out from underneath you. You want to be careful there.

Asking for exclusivity is fine but it also shouldn’t be open-ended. From a buyer’s perspective, I find that most times, depending on how you’re going to finance the transaction, whether you have a line of credit and you’re going to be drawing against that or you’re going to the bank to get a loan, typically 45 to 60 days is a reasonable amount of time to expect that an owner will give you to have a clear shot at doing the deal. Sometimes you may need a little bit longer if there are some specific things to that deal. One thing that comes to mind is maybe you need to get vendor approval. That may take a little bit longer. Maybe exclusivity becomes 75 or 90 days but 45 to 60 days should give you enough time to look at a deal and determine whether or not you want to move forward and do it or get indications from your lender that they’re going to secure a loan for you. It’s this fishing amount of time in most cases.

If the owner does give you exclusivity terms, if you get to a point in time where you don’t think the deal makes any sense, do the owner a favor and terminate the deal quickly. They’re going to want to get back out to market. They might have had some momentum with other buyers. Give them the opportunity without dragging this out to go bring back those other buyers. You want to get exclusivity but be aware that there’s an owner that wants to trade this deal. If you’re not interested in moving forward, get out of the deal as quickly as you can. If there are third-party advisors, intermediaries like myself involved in the transaction, they might push back. They might not want to accept exclusivity on behalf of their client because they have a robust market.

It’s incredibly competitive out there for good deals. There are lots of buyers chasing good deals. In the rare instance, there might be situations where the advisor, along with the client, don’t want to give exclusivity because the market is crazy. One of the things that you can do there is maybe reached a halfway point with the owner so that they can continue to market the business and not lose out on potential buyers. However, they can’t engage in a negotiation with another buyer and respond to any offers until your exclusivity period is over. It’s a nice compromise if that deal is getting a lot of traction and the owner and the advisors are pushing back on the concept of exclusivity. You’ve got some options here. There are some others. This is where you need a good attorney, a good intermediary to help you get through that. There are a number of other ways to approach this but those are the basics.

M&A Exclusivity: If the owner gives you exclusivity terms but gets to a point where you don’t think the deal makes any sense, do the owner a favor and terminate the deal quickly.

Let me switch over and talk about exclusivity from a seller’s perspective. As an owner of a business, you’ve reached that point where you’ve decided you’re going to sell the business and you want to get as much activities as possible. The thought of taking your business off the market for some period of time is not all that appealing. If you’ve been reading the first part of this, you can understand hopefully from a buyer’s perspective why this is important. They’re going to start spending money and maybe lots of it. I’m usually on the side of a buyer here that an owner should be willing to give the buyer some level of exclusivity. However, I do think that there are some things you can do with the verbiage in a letter of intent that keeps the buyer on track so that it’s not just blanket exclusivity. They have milestones to meet.

Let me be specific here. What you might say is, “Mr. Buyer, I’m going to give you 60 days of exclusivity. However, I need to know that you’ve applied for your loan within five days of signing this LOI and that you’ve engaged the forensic accountant within seven days. I need to know you’ve filed your banking application paperwork within ten days.” There are aiming number of things that have to happen along the way and should be happening along the way so you can add what I call modified exclusivity into a letter of intent. While the buyer has the comfort and knowledge of knowing they have exclusivity, they don’t just have this blanket period of time and drag their feet. They’ve got to move on in earnest and do everything they can in good faith to get the deal done as quickly as possible.

I find that to be a tremendous compromise when owners are giving up exclusivity. You modify it so that everything’s following a certain schedule. Understand, as an owner of a business, there’s going to come to a point in time where buyers can’t move forward one way or another unless you’re delivering information to them. There’s an onus on you that you have to be delivering information and answering their diligence requests in a timely manner or they’re going to miss their dates. You’re going to wind up with a problem on the deal. It’s incumbent upon all parties to move quickly, expeditiously and in good faith. The last thing that I’ll mention here from a seller’s perspective is it is a crazy market. There are a lot of buyers looking at great deals. Every now and then, a buyer is going to come along and waive their exclusivity rights.

M&A Exclusivity: It’s okay to accept deals without exclusivity but never kick buyers out of the process just because you’ve got a better offer.

I would caution you that if they do, I won’t use it as a license to go out and maybe accept other offers. Use it in a way so that you’re smart. If you’re using an intermediary like us to help you with the transaction, you can take offers and let them be in a backup position. You can even state how long they’ll be in a backup position which gives the current buyer a little more pressure to get the deal done and move as quickly as possible. It’s okay to accept deals without exclusivity but I caution against kicking buyers out of the process because you’ve got a better offer. If it’s an incredibly better offer, then you have to do what’s best for you but I still think that there’s karma in deals. You do things in good faith. Hopefully, it comes back to pay you very well in other ways.

Hopefully, this topic is of help. It’s an important one. People overlooked it. They’ll overlook the intricacies of how you can slice and dice exclusivity, not just give it away from a blanket perspective. Buyers, please understand that if a seller comes back with modified exclusivity, that’s a good way for everybody to keep the deal moving and moving quickly. I hope you enjoyed this topic. We’re going to have a bunch more like this. If you enjoy our content, please remember to subscribe and review our show. I look forward to seeing you again on the next episode of the show. Until then, please remember that scaling, acquiring or selling a business takes time, preparation and proper knowledge.

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