In almost all cases, before a buyer will commit resources to conduct exhaustive due diligence, they will demand an exclusivity period, during which time the seller will not talk with any other potential buyers. This is usually documented in the form of a Letter of Intent (“LOI”).
How long is an appropriate amount of time for an exclusivity period? Over the past 21 years, Alderman & Company has completed deals with a wide variety of exclusivity periods. However, they are typically 45 – 90 days. A shorter period is preferred by sellers; buyers prefer longer periods. Longer exclusivity periods give buyers, their accountants, attorneys, and consultants more time to try to find reasons to lower their offer. Shorter periods give the seller the ability to reengage with other buyers more quickly.
Regardless of the duration of the exclusivity period, we’ve found that sellers increase their chance of success by establishing specific milestones that the buyer must accomplish to retain exclusivity. While milestones and short exclusivity periods can give sellers more control over the process, it is important to remember that an LOI is not a binding commitment to complete the proposed transaction. The buyer can walk from the transaction at any time for any or no reason.
For the reasons above, LOI exclusivity periods can be daunting to owners of middle-market Aerospace and Defense companies. Accordingly, we advise sellers to delay entering an LOI until they have found a perfect-fit buyer who has the motivation and capacity to complete the purchase on a timely basis.
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