When business owners receive a Letter of Intent (LOI) to acquire their company, their attention naturally gravitates toward the purchase price. How much cash will I receive at closing? Is there an earnout? How much equity am I being asked to roll over? What happens to my working capital?
All important questions. But there’s another provision in nearly every LOI that deserves just as much attention, and it typically doesn’t have a dollar sign attached to it. That provision is exclusivity, and it can have a significant impact on the ultimate outcome of your transaction.
It’s usually a relatively straightforward provision stating that, for a specified period, typically 60 to 90 days, the seller agrees not to solicit, entertain, or negotiate competing offers while the buyer conducts due diligence and works toward closing.
Sounds reasonable, right? And in most cases, it is. Buyers are about to invest considerable time and money in a Quality of Earnings (QoE) analysis, legal diligence, and transaction documentation. They understandably want assurance that the seller isn’t simultaneously shopping the business to another buyer.
But here’s what sellers need to understand: The moment you sign an LOI with exclusivity, the negotiating dynamics of your transaction change.
Before the LOI, Buyers Compete. After the LOI, They Don’t.
During a competitive sale process, prospective buyers know they’re not the only ones interested in acquiring your business. That competition creates urgency and helps establish market value. It’s one of the reasons I strongly believe in running a structured sale process rather than simply negotiating with the first buyer who approaches a business owner.
Once an LOI is signed, however, the seller generally agrees to stop engaging with other potential buyers. The selected buyer now has an exclusive opportunity to complete the acquisition. The seller has effectively taken the company off the market, but the buyer typically hasn’t made a binding commitment to complete the purchase. That distinction matters.
I’ve seen situations where buyers discover legitimate financial issues during diligence that justify revisiting the purchase price. I’ve also seen buyers become considerably more aggressive in their negotiations once the competitive process has ended. Not every price adjustment is a retrade, and not every retrade is unjustified. But when a seller has already invested months in a transaction, the prospect of starting over can make even an unattractive, revised offer difficult to reject.
This is why I believe exclusivity should be treated as something of value, not simply another paragraph in the LOI. You’re giving one buyer the exclusive right to pursue your business for a defined period, and that right should come with reasonable expectations and accountability.
The Exclusivity Clock Should Work for Both Parties
In most of the transactions I advise on, the exclusivity period is somewhere between 60 and 90 days. Whether that’s sufficient depends on the complexity of the transaction, the buyer’s diligence requirements, and how well-prepared the seller is before signing.
One of the reasons we spend so much time preparing our clients before going to market is to minimize surprises once we’re under LOI. Financial statements should be reconciled, EBITDA adjustments documented, customer contracts organized, and the virtual data room substantially populated. The more prepared the seller is, the less opportunity there is for diligence to drag on unnecessarily.
But preparation is only half the equation. Buyers also need to be held accountable for maintaining momentum throughout the process. I want to know when the QoE will begin, when the buyer expects to complete its financial and operational diligence, when the first draft of the purchase agreement will be delivered, and what issues might prevent us from closing within the agreed timeframe.
An exclusivity period shouldn’t be an open-ended invitation for a buyer to move at whatever pace is convenient. Both parties should have a clear understanding of the timetable, the milestones, and their respective responsibilities. And when a buyer requests an extension, my first question is always why additional time is necessary and what we expect to accomplish by granting it.
Sometimes Extending Exclusivity Is the Smartest Decision
Here’s where experience has taught me that there are exceptions to almost every rule. I’ve been involved in two transactions where extending the diligence period was actually in the seller’s best interest, and both illustrate why managing exclusivity requires more than simply watching the calendar.
In both situations, the buyer’s original offer was based on the trailing twelve-month (TTM) financial results we had presented in our Blind Profile. However, by the time the buyer completed its Quality of Earnings analysis, the TTM period had moved forward by a couple of months. Unfortunately, those additional months reflected weaker revenue (due either to the time of year or one-time projects being light), which negatively affected the updated financial results.
Suddenly, the buyer was looking at a business with lower TTM performance than the financial information used to establish the original purchase price. That can become a problem very quickly, particularly when the valuation is based on a multiple of adjusted EBITDA. Even a relatively modest decline in earnings can translate into a significant reduction in enterprise value.
But in both cases, the buyers genuinely liked the businesses and wanted to complete the acquisitions. Rather than immediately reducing their offers, they were willing to extend the diligence period to give the sellers another month or two to improve their financial performance.
In one of those transactions, I actually recommended the extension. I knew my seller had a strong pipeline of business that simply hadn’t closed yet. I believed the weaker financial performance was temporary and that giving the business additional time could help support the valuation we had originally negotiated. Rather than accept a lower purchase price based on what appeared to be a timing issue, I felt it was worth allowing the financial results an opportunity to catch up.
In both transactions, the additional time paid off.
In one case, the seller recovered all of the financial performance that had slipped, allowing us to preserve the original valuation. In the other, the recovery wasn’t quite as strong, but the improvement still helped support the seller’s negotiating position and mitigate a potential reduction in purchase price.
Had we insisted on closing immediately, we might have faced a much more difficult valuation discussion. Instead, we used the additional time strategically, with a clear understanding of what needed to happen and why the extension made financial sense.
That’s a very different situation from a buyer who simply hasn’t completed diligence on time. Sometimes the smartest way to protect a seller’s valuation isn’t to close faster. It’s to recognize when a little more time can produce a better financial outcome. Of course, a strong pipeline doesn’t guarantee revenue, and an extension doesn’t guarantee that the original valuation will hold. It’s a calculated risk that needs to be evaluated based on the specific circumstances of the transaction.
Before You Agree to an Extension, Ask the Right Questions
One important point that sellers sometimes overlook is that an extension of exclusivity should not be automatic. If the LOI provides for 60 days of exclusivity, that period should expire at the end of the agreed term unless the parties have specifically negotiated an automatic extension provision or otherwise agreed to extend it. I generally prefer extensions to require mutual written agreement rather than allowing the buyer to extend exclusivity unilaterally.
When a buyer requests additional time, I don’t automatically say yes or no. I want to understand what’s driving the request. Has the buyer completed its QoE? Are there unresolved financial issues? Has the purchase agreement been drafted? Is financing committed or still being arranged? What specifically needs to happen during the additional period, and perhaps most importantly, what does the seller gain by agreeing to the extension?
If the buyer needs another 30 days because its legal team hasn’t prioritized the transaction, that’s one conversation. If another 30 or 60 days could allow the seller to demonstrate improved financial performance and potentially preserve hundreds of thousands of dollars in purchase price, that’s an entirely different conversation.
An extension should have a clearly defined expiration date, specific milestones, and an understanding of what both parties are expected to accomplish during the additional time. Depending on the circumstances, I may also seek confirmation that the buyer remains committed to the key economic terms of the LOI, subject to specifically identified diligence issues.
The objective isn’t to make the transaction unnecessarily difficult for the buyer. It’s to ensure that both parties remain committed to moving toward a successful closing. Exclusivity is something the seller grants, not something the buyer should take for granted.
Time Kills All Deals. But Timing Also Matters.
Anyone who has worked with me knows one of my favorite expressions: Time kills all deals. And after nearly 40 transactions, I firmly believe it.
The longer a transaction remains in diligence, the greater the opportunity for something to go wrong. Financial performance can change, key employees can leave, customers can be lost, financing markets can shift, and even the enthusiasm that brought the parties together can begin to fade. That’s why I push hard to maintain momentum once an LOI is signed and why I believe both buyers and sellers should approach the diligence process with a sense of urgency.
But experience has also taught me that speed alone isn’t the objective. The objective is to complete the transaction on the best possible terms for the seller. Sometimes that means holding the buyer’s feet to the fire and insisting on the original closing schedule. Other times, it means recognizing that an additional 30 or 60 days could be the difference between accepting a reduced valuation and preserving the economics of the original deal.
The key is knowing the difference and making that decision strategically rather than simply reacting to a buyer’s request.
So, before you sign that LOI, don’t focus exclusively on the purchase price. Pay close attention to the exclusivity provision, understand what you’re agreeing to, and make sure there’s a realistic plan to get from signing to closing. And if an extension becomes necessary, remember that it’s another opportunity to negotiate, not simply a formality.
Because the most expensive provision in your LOI might just be the one that doesn’t mention money at all.
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