Exclusivity Agreement

An exclusivity agreement obliges the seller to negotiate with only one buyer for a certain period of time. During this phase, the seller may not hold competing discussions with other interested parties. This gives the buyer security to complete the review and negotiation calmly. The rationale is economically obvious: full due diligence costs a bidder substantial sums for accountants, lawyers and other advisors, and exclusivity limits the risk of incurring that expense without subsequently completing the deal.

Periods of a few weeks up to around three months are common, often with an extension option where progress is evident. The agreement covers not only the prohibition on negotiating but regularly also a ban on approaching third parties, a duty to report unsolicited offers, confidentiality and occasionally cost reimbursement or a break-up fee. Granting exclusivity is a sensitive step for the seller, because it gives away the strongest negotiating tool: without a credible alternative, bargaining power falls noticeably and renegotiation after diligence becomes more likely. In professionally run processes exclusivity is therefore granted only once binding offers are in hand and kept as short as possible, often combined with a fixed timetable, a largely negotiated draft agreement and the condition that the bidder may adjust its price only for newly discovered material matters.

The arrangement forms part of the letter of intent or is concluded as a separate short document. For the seller it has proven useful to tie exclusivity expressly to conditions: adherence to an agreed timetable, the offer remaining unchanged, and production of a firm financing commitment. The agreement can provide that exclusivity ends automatically if one of these conditions fails, without any need for termination. It is also advisable to provide that the seller may receive unsolicited offers and inform the bidder of them, since otherwise it would be forced to ignore a better offer.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.