When you’re buying or selling a business, some of your main considerations will be price, the structure of the transactions, complying with transfer regulations established by the Florida Division of Corporations, and related details.
One key issue that may not cross your mind is an exclusivity period.
This prohibits a seller from dealing with any other potential buyers while the transaction is still pending.
To determine whether you’d want one, you should understand what exclusivity means, learn about the key clauses, and consult with a Florida business law attorney about the pros and cons.
Overview of Exclusivity Clauses in Business Transactions
An exclusivity provision defines a length of time, typically 1-2 months, where a seller cannot deal with any party other than the prospective buyer regarding the sale of the business.
Exclusivity covers a wide range of activities involving a transaction, including:
- Advertising the business as being for sale;
- Entertaining an offer made by another party;
- Entering into negotiations regarding the sale of the business; or,
- Accepting an offer.
The specific terms, including the duration and itemized list of prohibited activities, will be included in the exclusivity section of the letter of intent executed by the buyer and seller.
Purpose of an Exclusivity Period
These provisions are essential to protect both buyer and seller in a transaction involving sale of a business.
In general, the transaction doesn’t proceed in the same fashion as the purchase of a home or car. There are formalities, due diligence periods, and other tasks that cannot be accomplished overnight. That means exclusivity periods offer advantages to both parties to the transaction.
Buyer Benefits: As a potential buyer, you need time to go through the books of the target business and conduct your own assessment of whether the deal is fair. Reviewing the essential information takes time, and you don’t want to feel rushed.
Seller Benefits: If you’re on the other side of the transaction, you don’t want to go through the effort and time in selling your business – only to have the buyer proceed lackadaisically or dwell on minute details. After all, even though you have a letter of intent, you don’t have a complete agreement.
If the buyer ultimately backs out, you’ll have to start the entire process from scratch, which could affect your business value and bottom line. For this reason, sellers have
“A carefully drafted exclusivity provision—as part of a purchase offer, Term Sheet, or Letter of Intent—is key to the negotiation process. It gives the parties time and space to work out the details of a transaction, and even decide whether a transaction can happen, without either party risking terrible consequences.”BrewerLong Attorney Trevor Brewer
Key Provisions in an Exclusivity Agreement
Though they’re usually part of a larger document as the letter of intent, there are several key clauses that comprise the exclusivity arrangement between a buyer and seller. Some of the more important provisions include:
No Shop Provisions: The crux of an exclusivity agreement is the seller’s promise to not solicit, negotiate, or enter into agreements regarding alternative transactions with other prospective buyers.
It’s also possible to include the requirement that the seller end any existing sale discussions with third parties.
Exclusivity Period: The start and end dates are the key details for this section of the agreement. Usually, the period begins when the buyer has a meaningful indication of interest, often by signing a letter of intent. However, there are other documents that can contain exclusivity clauses, such as a term sheet or offer for sale.
The end of the exclusivity is typically marked by both parties’ signatures on an acquisition contract or bill of sale. Obviously, a buyer will want a longer period to address due diligence, but a seller may want to negotiate a shorter duration – such as 1-3 weeks.
Termination: Both parties should give themselves an “out” in case the transaction doesn’t measure up to expectations. As the buyer, you may uncover issues that affect the sale price or intentions for the business. The seller could negotiate terms that terminate the exclusivity period if the buyer isn’t making progress toward completing the transaction.
Duty of Good Faith: Any purchase agreement should require parties to act in good faith throughout the exclusivity period. A failure to include such terms – or refusal to sign – demonstrates that either the buyer or seller isn’t committed to completing the deal.
Consult with an Orlando, FL Business Law Attorney About Exclusivity Issues
For more information on how exclusivity periods work in the sale or purchase of a business, please contact BrewerLong. You can set up a free appointment by calling 407.660.2964 or visiting us online. Our team serves business clients in Orlando, Sanford, and throughout Central Florida, and we’re happy to advise you on the key legal issues.