Lifecycle of a business – M&A Exits: Exclusivity Agreements
Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.
With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.
We’ve considered the main aspects of the lifecycle of a business from the beginning and you now want to sell….
M&A Exits: Exclusivity Agreements
You’re thinking about selling your business and a potential buyer has requested an exclusivity agreement. What do they mean and should you agree to it?
An exclusivity agreement prevents a seller from entering into discussions or negotiating with other potential buyers for a set period of time, thereby reducing the risk that the original buyer will spend time, money and effort in performing due diligence on a target company and negotiating with the seller, only for the seller to then sell to someone else.
Under English law, an exclusivity agreement does not oblige the buyer and the seller to agree a contract and either party can still walk away after the end of the exclusivity period (unlike in some jurisdictions), but it does give the buyer a head start over other potential buyers.
Key points to consider when negotiating an exclusivity agreement include:
Who are the parties?
The exclusivity agreement is between the buyer and the seller, and so, in a share sale (see our article here), the target company will usually not be included as a party. A buyer will often negotiate that the seller will procure that the target company shall not breach the seller’s exclusivity undertakings.
How long is the exclusivity period?
The exclusivity period must be specific, otherwise the seller’s exclusivity undertakings may not be enforceable. The length of the period will depend on the circumstances of each transaction and is a matter for negotiation.
Seller’s undertakings
The exclusivity agreement will set out what a seller may not do during the exclusivity period. Generally, the buyer will want the seller to:
- terminate any existing discussions with other potential buyers; and
- not provide information regarding the target company to, or negotiate with or solicit offers from, other potential buyers during the exclusivity period.
In addition, the buyer may insist that the seller notifies it of any approaches received from other potential buyers.
Seller protections
A seller should ensure that the terms of the exclusivity agreement are not so restrictive that it hinders its usual business operations during the exclusivity period. As such, specific wording to this effect will usually be requested by the seller.
In addition, the seller will want comfort that the exclusivity agreement will fall away if negotiations with the potential buyer end or if the buyer is not progressing with the transaction. A seller may also be able to include specific milestones for the buyer (for example, providing a first draft of the purchase agreement by a given date) which, if not adhered to, will result in the termination of the exclusivity agreement, or insist that exclusivity will no longer apply if the buyer seeks to materially amend the terms of the deal.
What happens if the seller breaches the exclusivity agreement?
The exclusivity agreement may provide that the buyer will be paid a fixed amount if the seller is in breach or include an indemnity which requires the seller to reimburse the buyer £ for £ for any loss suffered. If silent, the amount of damages will be determined by the court.
An alternative remedy may be an injunction which would stop the seller from continuing its breach (for example, force the seller to stop any discussions with a third party). Injunctions are awarded at the court’s discretion and so there is no guarantee that a buyer would be successful in obtaining one. In any event, given that exclusivity periods are generally quite short and that the original buyer might not become aware of the breach until late in the process, being granted an injunction is often not particularly helpful to a buyer.
Conclusion
Exclusivity agreements are buyer documents but can provide comfort to a seller that a potential buyer is at least serious about the deal. If, as a seller, you agree to enter into an exclusivity agreement, you can protect yourself to some degree by careful drafting and should take legal advice as soon as possible.
If you have any queries about the above or wish to discuss your exit or an acquisition in more detail, please get in touch with your usual Forsters’ contact or any member of the Forsters’ Corporate team.
Disclaimer
This note reflects the law as at 8 July 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
