Exclusivity clause in LOI - is it really needed?

November 28, 2020

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Hyderabad, Telangana, India

All - a basic question really. Is the exclusivity clause, which prevents the Seller from engaging with other bidders for say 90 days, really needed in the LOI? If as a Buyer, I am confident that with the resources at hand, I can get to the purchase agreement faster than any other bidder and further, since most Sellers/Brokers seem to care about closing speed as much as valuation, is this clause really value added for a Buyer? What am I missing? Appreciate thoughts.

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Reply by an investor
from WU Vienna University of Economics and Business in Vienna, Austria

Yes for sure. If you are going to spend money on DD cost, you want to ensure that the seller is only going to talk to you, at least as far as you can control. When an attractive target is for sale people will promise all kinds of prices that they don't follow through on just to get the seller to not close with you. We have sometimes been able to include provisions that result in breakage fees (approx. as much as the DD cost), in case that the seller acts in bad faith and doesn't follow through with his intent to sell or sells to somebody else.

Reply by a searcher
from Harvard University in San Juan, Puerto Rico

It is very much needed to protect you, the buyer, from spending tens of thousands of dollars in closing costs only to get the deal swiped by the seller getting a better offer from somebody else halfway through the process. If you are super confident in getting a quick close, you can put a shorter exclusivity period in there, but since the exclusivity clause is standard, why give away something for free out of the gate? You also never know what you will find in diligence, unexpected things will come up that will delay closing.

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