Some clients--in particular, self-funded searchers acquiring their first company--sometimes ask what protections they should seek, if the seller's broker wants to continue to market the target during an exclusivity period. Some thoughts below. Comments / questions welcome.


Any LOI worth its salt will contain an exclusivity provision. It’s there to protect the buyer: It prevents the seller from accepting other offers for a period of time—in smaller transactions, normally between two to three months. This gives the buyer space to conduct diligence and negotiate a purchase agreement without having to worry about competing offers muddying the water.

But deals sometimes fall apart, despite the best efforts of the parties. And in that case, the seller will have to find another suiter. This takes time. The seller has already lost several months to the buyer’s exclusivity period. Another offer may not come in for weeks. The new buyer will also want an exclusivity period. Months quickly turn into a year.

To mitigate this problem, sellers push for an exception: They want their brokers to continue to market the business during the exclusivity period (in truth, the broker is actually the one often pushing for this reprieve). Such a move is commonplace. Indeed, if the parties are relying on a broker’s form purchase agreement, this exception will almost certainly be included.
Yet from the buyer’s perspective, this exception poses an obvious risk: If the broker continues to market the business and receives additional offers, one of those offers may exceed the buyer’s offer. Subsequently, if the seller were to find out, she may intentionally frustrate negotiations in an attempt to get out from under the buyer’s LOI.

Despite this risk, it is hard for a buyer to push back; again, this exception is commonplace. That does not mean, however, that the buyer does not have options:
First, the buyer should make sure that the seller is kept in the dark about any contact the broker has with other would-be suitors. This is as common as the exception itself. So if a seller pushes back here, this should raise a red flag.

Second, the buyer should require that she is kept abreast of any competing offers that the broker receives. If the seller’s behavior changes for the worse during negotiations, and the buyer knows that a competing offer has come in, the buyer has grounds to suspect bad faith (and can act accordingly).
Third, the buyer should push for a longer exclusivity period. If the seller then employs the waiting game as a means to frustrate the deal, she will need to wait it out for months just to start the process all over again with a new buyer. The seller will not want to do so. After all, no one gets paid until the deal is done. The competing offer would have to be significantly larger to take on that risk. And, usually, that is not the case. As such, the longer the exclusivity period, the more reason the seller has to negotiate in good faith.
Whatever options you can get agreed, if the eventual LOI places an obligation on the broker to act or refrain from acting in a certain way, you should make sure that the broker, in addition to the seller, signs the LOI, to help establish the existence of a binding contract. At the end of the day, money talks. So protect yourselves!