Market conditions suggest that the trend toward longer durations will continue in 2023.
Amid the current economic uncertainty, many PE buyers are taking extra precautions to ensure that the deals they pursue will deliver the value they expect. This trend is highlighted in our data on exclusivity deals (see chart), which is collected in Goodwin’s Private Equity Deal Database.
In 2021, only about 6% of deals that involved exclusivity periods had a duration of 61 days or more. In 2022, nearly 40% had a duration of 61 days or more (and most had a duration of at least 76 days). That is a significant increase in duration year over year, and current trends suggest that the trend is continuing in 2023.
In this article, we provide some context about exclusivity periods, including why buyers generally prefer longer durations and sellers generally prefer shorter durations. We wrap up with some considerations for dealmakers, including thoughts on what’s driving the trend toward longer durations.
What Is an Exclusivity Period?
An exclusivity period, also known as a “no-shop” period, is an agreement between a seller and a buyer wherein the seller agrees to negotiate exclusively with a single buyer and not entertain discussions or negotiations with other potential buyers during such period. This period is usually negotiated and agreed upon by both parties in a letter of intent. There are various contextual factors that go into determining the length of an exclusivity period, but buyers generally prefer longer periods, while sellers typically want no or short exclusivity periods.
Why Would a Buyer Want a Longer Exclusivity Period?
Buyers often seek to negotiate longer exclusivity periods for a variety of reasons. One significant benefit is that it allows them more time to conduct thorough due diligence. With a longer exclusivity period, the buyer can gain a deeper understanding of the target company’s financial, legal, and operational situation, and identify any potential risks or liabilities that could affect the deal’s value. In addition, a longer exclusivity period can help reduce competition from other potential buyers. As the length of time a company is locked up increases, the pool of competing bidders is reduced, which can give the buyer an advantage in securing more favorable deal terms or a better price. During the exclusivity period, the buyer is often informed of any competing bids, enabling it to make informed decisions and adjust its offer if necessary (although sell-side practitioners should push to not have to provide deal terms of any competing bids that come in during the exclusivity period). Finally, an exclusivity period provides the buyer with comfort in incurring costs and investing time and resources into the transaction because they feel more secure in their ability to complete the deal.
Why Would a Seller Want a Shorter Exclusivity Period?
Sellers often opt for a shorter exclusivity period or no exclusivity period at all because it may provide them with more exit options and a greater ability to maximize the value of the transaction. For instance, in a hot-auction process, a seller can create a sense of urgency and competition among the buyers, resulting in higher offers and a quicker closing of the deal. As a result, buyers often do not receive exclusivity in a hot auction scenario. This is because sellers strongly prefer to make buyers move quickly toward a signed agreement. Sellers understand that by withholding exclusivity, they can create a competitive environment in which multiple buyers are vying for the opportunity to secure the deal. This approach compels buyers to act swiftly and present their most attractive offers, ultimately leading to a faster closing of the transaction. Granting exclusivity to a buyer too early in the process can reduce the incentive for other potential buyers to move quickly and may result in a longer transaction process. Therefore, sellers may prefer to keep their options open and continue negotiating with multiple buyers until they feel confident they have secured the best deal possible.
Deal Practitioner Considerations
Recent trends in the M&A market suggest that buyers may now have more bargaining power to negotiate longer exclusivity periods in deals. This is a result of current market conditions, which are characterized by slower deal flow and a greater focus on due diligence. By negotiating longer exclusivity periods, buyers can gain an advantage in the negotiation process, reduce competition, and increase their comfort in incurring costs. This is a departure from the fast-paced environment of 2021, in which buyers were often unable to negotiate longer exclusivity periods due to the urgency of the deals. However, it is important to keep in mind that not all deals are created equal, and some fast-paced deals may not provide buyers with the necessary leverage to push for a longer exclusivity period. Therefore, it is important for buyers to carefully consider the specific circumstances of their target and negotiate exclusivity periods accordingly. Overall, deal practitioners should be aware of these market trends and work with their clients to negotiate exclusivity periods that meet their unique needs and goals.