From LOI to Exclusivity: Negotiating From a Position of Alternatives

Reading the LOIs against each other

The LOIs that arrive at the deadline are compared the same way the IOIs were, with one difference: they are the buyer's current proposal for the transaction, not a complete purchase agreement. The attorney restates each on a common basis, breaks the structure into cash at close and deferred components, and lists every term each LOI leaves silent. Silence is the thing to look for. A buyer that has not stated a working-capital target, has not addressed the treatment of transaction expenses, has not specified the escrow amount, or has not described the indemnity structure it expects has preserved room to negotiate each of those points during exclusivity. Working-capital and other closing adjustments can materially change the amount paid, and their definitions and procedures need careful drafting. [2]

The attorney should also compare what each LOI asks for. Exclusivity length. Diligence period. Conditions to signing. Whether the buyer wants the owner's employment agreement or restrictive covenants settled before the purchase agreement. A buyer asking for ninety days of exclusivity with financing contingent is asking the client to take the business off the market for a quarter on a promise. The right comparison depends on the client's priorities, the buyer's proof of funds or financing commitment, and how much diligence remains.

The comparison goes to the client with the attorney's recommendation on which buyer to negotiate with first and which to hold in reserve.

Negotiating the terms into the letter

With the client's choice made, the attorney goes back to the preferred buyer with a markup. The markup aims to close every open term the client needs to compare and approve. Enterprise value, stated as a number. Working-capital target, stated as a number or a precise method, because working-capital definitions and true-up procedures can become a source of post-closing disagreement. Treatment of cash, debt, and transaction expenses. Escrow or holdback amount and duration, and whether a representation and warranty insurance policy will replace or reduce it. The indemnity structure in outline: cap, basket, survival periods. The earnout definition if there is one, including the metric, the accounting policies, and the buyer's operating covenants during the earnout period. The owner's post-closing role, compensation, and restrictive covenants. The buyer's financing, with commitment evidence. The diligence scope, the period, and the target signing date.

The buyer will resist putting some of these in the LOI on the ground that the LOI is non-binding and the details belong in the purchase agreement. The attorney's answer is that the seller is choosing among buyers on the basis of the proposed terms, even if the economic terms remain subject to definitive documentation. The parties should identify which provisions are binding and which are not. A filed LOI illustrates the distinction: it made no-shop and other specified provisions binding while reserving material matters for definitive documentation. [1] The alternatives make the seller's request for clarity credible.

The attorney should know which terms the client will trade and which the client will not before the markup goes out. The client decides, and the attorney negotiates.

Keeping the second buyer warm

While the preferred buyer is responding to the markup, the attorney keeps the second-choice buyer engaged. This is not a bluff. The second buyer is told, accurately, that the seller is in discussions on the terms of an LOI, that no exclusivity has been granted, and that the seller would welcome an improved letter. Some second buyers improve. Some wait. Either way, the preferred buyer knows that the seller has not yet committed, and that knowledge can move the open terms.

The attorney should never disclose one buyer's terms to another, and should never state that a competing offer exists if it does not. The alternatives are real because the process produced them, and the attorney's credibility with every buyer on the list depends on describing them accurately.

If the preferred buyer refuses to close the open terms, the attorney and the client can turn to the second buyer with the same markup. A process that produced three or more LOIs allows this; a process that produced one does not, which is the argument for the earlier phases.

The exclusivity grant

Exclusivity is the seller's largest concession in the process, and it is granted only when the LOI and any separate exclusivity terms are fully negotiated and signed. The grant should be limited to the time reasonably needed for the buyer's documented work. There is no universal 30-to-45-day rule. Market practice varies with diligence scope and conditions, and recent deal data has shown materially longer periods in some conditions. Sellers generally prefer shorter periods, while buyers often seek more time. [3] Any extension should require the seller's agreement and be tied to the buyer's progress.

The grant should be conditioned where the client can obtain those protections: exclusivity can end under negotiated circumstances such as a material change to the price or structure stated in the LOI, a lapse in a financing commitment, or a failure to deliver a purchase-agreement draft by a stated date. The agreement should be specific about what the seller may not do, which may include soliciting or negotiating with other buyers, and what the seller may still do, such as respond to an unsolicited inquiry by stating that the company is under exclusivity. The exact scope and enforceability depend on the governing agreement and applicable law, so the attorney should draft and explain the provision rather than assume a standard result.

The attorney should also build in a check-in. Halfway through the exclusivity period, the buyer should report on diligence progress and confirm whether it is proceeding on the LOI terms. A buyer that cannot give that confirmation may be signaling a re-trade, and the seller should know before the period ends.

The client signs the LOI and the exclusivity grant. The attorney explains to the client, before signing, exactly what the client is giving up, what remains available, and for how long.

Telling the other buyers

Once the LOI is signed, the other second-round buyers are told that the seller has entered exclusivity with another party. They are thanked, told that the seller will be in touch if circumstances change, and reminded of their obligations under the NDA, including the return or destruction of materials and any continuing non-solicitation obligations. Data-room access for those buyers ends when the process owner implements that decision under the applicable NDA and access terms.

The attorney keeps the file on each of them. If the exclusive buyer re-trades or fails, the second buyer's LOI is still in the file, and the conversation that restarts is a short one. Buyers know this, and the exclusive buyer's awareness of it can help hold the deal to the negotiated framework through diligence. It is not a substitute for a carefully drafted LOI or purchase agreement.

One thing to do this week: take any LOI you have on file from a prior transaction and list every term it left open. Then note which of those terms moved against the seller between the LOI and the signed purchase agreement. That list is the markup you will send on the next deal.

How Acquivo Pro fits

Acquivo Pro tracks LOI status for every buyer in the firm's single pipeline, alongside the IOI, the NDA, and the data-room history, so when the attorney compares LOIs and keeps a second buyer warm, every buyer's full record is available in one place. When exclusivity is granted and the other buyers' access ends, the pipeline shows the change for that client without disturbing the firm's other processes. The attorney negotiates every term, decides with the client whom to sign with, and drafts the exclusivity grant; the platform organizes and tracks. To walk through a process on a client you have in mind, request a demo through the Contact page.