Capittal's view: a buyer wants exclusivity, should I grant it?

Quick answer

Capittal's view is that exclusivity is neither a favour nor a formality: it is the currency with which a seller pays for a buyer's seriousness. Grant it late, short, conditional and with the price already agreed in writing, or do not grant it at all. A buyer asking for months of exclusivity before putting price and structure on paper is not asking you for time. They are asking you to switch off the market for free.

Why does the buyer want exclusivity, and what do they gain from it?

The legitimate reason is cost. The buyer pays for due diligence: lawyers, financial audit, tax advisers, employment review and, if the purchase is leveraged, the lending bank. That is tens of thousands of euros committed before anything is signed. Nobody takes on that spend knowing somebody else could close while they work.

Alongside that reason there are three they will not spell out.

• It switches off competitive tension. While two parties are interested, you negotiate against offers. Once exclusivity is signed, you negotiate against a calendar.
• It buys time to adjust the price. Every week of review is another week to find arguments for cutting the offer.
• It commits you. The longer you are inside the process, the more expensive it becomes to walk. You have told your family, you have opened up your information and in your own head you have already sold.

What exactly do I lose the day I sign exclusivity?

You lose the only two real levers a seller has.

The first is competitive tension. A buyer who knows somebody else is behind them improves the price, speeds up the timetable and softens conditions. That same buyer, on an exclusive basis, reviews at greater leisure and argues every point knowing you have no alternative to turn to that week.

The second is the clock. During exclusivity, time runs against you. Your company keeps trading and reporting numbers: if the quarter comes in weak, the buyer will use it. Your team starts to sense movement. And if the deal breaks in month five, you go back to market with two problems: half a year lost, and other candidates who now know somebody looked at your numbers and walked away.

When does it make sense to grant it?

It makes sense once there is nothing material left to negotiate on price. In other words, after the letter of intent and never before.

The correct order is this. You receive indicative offers from several candidates. You compare them. You negotiate with the best two or three until you have a signed letter of intent with price, payment structure and perimeter agreed. Only then do you grant exclusivity to your chosen buyer, so they can run a defined confirmatory due diligence.

Exclusivity is not there to negotiate the price. It is there to confirm that the agreed price is correct. If the buyer wants exclusivity in order to decide how much to offer you, the answer is no.

How does this relate to the LOI or Spanish letter of intent?

In Spain the letter of intent, the carta de intenciones, is not a codified contract. Its force depends on how each clause is drafted.

The usual and correct approach is a hybrid document.

• Non-binding part. Price, payment structure, treatment of any earn-out and conditions. It records intention, subject to the outcome of due diligence.
• Binding part. Confidentiality, exclusivity, allocation of costs, governing law and jurisdiction. These bind from signature.

Walking away from an advanced negotiation is not always free. Spanish courts have found pre-contractual liability where one party creates a reasonable expectation and then breaks off in a manner contrary to the good faith required by articles 7 and 1258 of Spain's Civil Code. That does not create a right to the agreed price, but to compensation for costs and for the trust defeated.

How do I limit exclusivity so that it does not tie me up?

With four written limits. Without them it is not exclusivity, it is a blank cheque.

• A short term. The usual pattern in the Spanish mid-market runs from thirty to ninety days. Grant the minimum that allows the review to happen, not the term the buyer asks for.
• Extensions only against milestones. Never automatic. It extends if the due diligence reports have been delivered, if the financing has a written commitment and if the buyer reconfirms the LOI price. Miss the milestones, no extension.
• Perimeter. Exclusivity covers the sale of the shares in that company to that buyer. It does not cover your subsidiaries, your property assets, a future capital increase or the sale of a different business line.
• Permitted activity. Put in writing that you can keep running the business normally, maintain conversations already open and receive unsolicited proposals.

And one calendar rule: exclusivity must expire by itself, without you having to do anything.

What must be agreed in writing before I sign it?

Everything that could later be used to cut your price. Whatever you leave for later will be decided later by the buyer.

• Price and formula. Amount, the multiple applied and the metric it applies to, with an exact definition of EBITDA and its adjustments.
• Debt and working capital. The definition of net financial debt and the normalised working capital level. Hundreds of thousands of euros move here without the multiple changing.
• Payment structure. How much at closing, how much deferred, how much in earn-out and how much held in escrow, with dates.
• Perimeter. Which companies, assets and properties are in, and what stays out.
• Your role after closing. Stay-on period, pay and non-compete, at least in outline.
• Scope of due diligence. What is reviewed, by which advisers and over how many weeks.

Which protective clauses should I ask for?

• Progress milestones. A timetable with verifiable deliverables: the information request list closed in week one, a draft sale and purchase agreement and the due diligence reports on fixed dates.
• Automatic lapse if the price drops. If the buyer proposes a figure below the LOI, exclusivity lapses that same day. It is the clause buyers dislike most and the one that protects you most.
• Cost reimbursement. If the buyer withdraws without an objective, documented reason arising from due diligence, they cover your adviser fees up to an agreed cap.
• Break-up fee. A fixed sum for unjustified withdrawal. It is rare in the mid-market, but asking for it measures how serious the buyer is.
• Proof of funding. A bank commitment or confirmation of available funds before the clock starts running.
• No-shop and no-talk. A no-shop stops you actively seeking other buyers. A no-talk stops you even replying to somebody who calls of their own accord. Sign the no-shop, reject the no-talk or, at the very least, reserve the right to receive and pass on any unsolicited proposal in writing.

What do I do if another buyer appears during exclusivity?

First, read what you signed. Under a no-shop you cannot start the conversation, but you can receive it. Under a hard-drafted no-talk you cannot even answer the email.

What you must never do is negotiate in parallel behind the buyer's back. It is a breach of contract and, if it comes out, you lose the deal you had and your reputation in a market where the same funds and the same advisers keep reappearing.

There are three clean routes. Log the proposal in writing and wait for the term to expire, usually closer than it feels. Tell the exclusive buyer that a third party has shown interest and ask them to improve or accelerate, if your drafting allows it. Or let exclusivity lapse for missed milestones, if they have already slipped the timetable.

Why does a process with several bidders raise the price more than negotiating with one?

Because the price of a mid-sized company is not set by a table of multiples. It is set by the best buyer available at that moment, and you do not know who that is until you have spoken to all of them.

An ordered process does three things a bilateral negotiation cannot. It reveals the real range, because two offers for the same business can sit far apart when one buyer has synergies the other does not. It changes buyer behaviour, because somebody who knows they are competing leads with their best price rather than their first price. And it gives you a plan B, which is the only thing that lets you say no without bluffing.

An ordered process does not mean a public auction or putting your name on the street. It means a short list of selected candidates, an information memorandum, a common timetable for indicative offers and a confidentiality agreement signed with each one.

What is the next step if exclusivity is already on the table?

Do not sign it this week. Do three things first. Write down what is genuinely agreed on price, debt, working capital and perimeter, and check how much of it is still open. Ask the buyer how they will fund the purchase and ask for the document that evidences it. And draw up a short list of the other credible buyers for your company, even if you never call them: it will tell you whether you are granting exclusivity to the best candidate or to the only one who turned up.

At Capittal Transacciones we negotiate exclusivity as part of the sale process, not as an annex, and only once price and structure are agreed in writing. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including the conversation about how much exclusivity to grant and in exchange for what.

Keep reading

• Guide: every decision you face when selling your company
• How to compare two offers for your company
• What you sign with an M&A adviser

Before granting exclusivity, talk to Capittal