A no shop provision is an important part of M&A transactions. Also known as an exclusivity clause, a no shop clause prohibits the seller from sharing information or negotiating with other would-be buyers for a specified timeframe.
Prior to this, the seller is negotiating with several buyers. The goal is to entertain multiple offers and figure out which buyer will ultimately provide the deal that best fits the seller’s wishes.
Once the seller has identified their preferred buyer, both parties sign a letter of intent (LOI). At this point the buyer will begin more comprehensive due diligence to validate their assumptions and make sure the business is everything they believed it to be.
Due diligence is an intense process that could include FBI background checks, equipment appraisals, environmental studies, and more. Some buyer groups conduct industry studies or hire a consultant to call the business’s customers under the guise of a confidential customer satisfaction survey.
Financial due diligence will be a massive focus, of course. Securing a quality of earnings report could cost anywhere from $15,000 to $150,000, depending on the size and complexity of the target acquisition.
Then there’s the necessary legal fees. The buyer’s representation will draft the asset or stock purchase agreement. This takes the framework of the LOI (typically five to seven pages) and puts it into comprehensive legalese (approximately 50 to 70 pages).
I’ve seen attorney fees as low as $15,000 for a small, routine deal and as high as $250,000 for a lower middle market acquisition (average range $30,000–$50,000). Private equity firms, which make up a major buyer category, are not shy about spending fees to make sure they have the necessary protections in a transaction.
At the end of the day, it might not be uncommon for the buyer to spend $100,000 to $500,000 in transactional costs. That’s why most buyer groups are adamant that they get a no shop provision for 30 to 90 days.
That exclusivity period is the protection they have, ensuring that if they’re going to spend time and money going down this path, the seller is not going to negotiate the deal out from under them and sell to another group.
From a seller’s standpoint, a no shop period can help limit buyer’s remorse or post-deal litigation. If multiple buyers are trying to be the first to the closing table, buyers might skimp on due diligence. Rushing due diligence can lead to unexpected discoveries after the deal is closed, and that can lead to conflict and litigation.
Conversely, long no shop periods are not in the seller’s best interest as there is always a risk that a deal will fall through in due diligence. A shorter no shop period gives sellers a better chance of recapturing interest from a competing buyer if the transaction is terminated
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