Brad Feld

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The No Shop Clause

Apr 22, 2006
Category Term Sheet

Since it’s a Saturday morning, I thought I’d cover a topic in our Letter of Intent series that my wife Amy would never agree to. Signing a letter of intent starts a serious and expensive process – for both the buyer and seller – as you both work to consumate a deal.  As a result, you should expect that a buyer will insist on a no shop provision similar to the one that we discussed in our term sheet series.  In the case of an acquisition, no shop provisions are almost always unilateral, especially if you are dealing with an acquisitive buyer. 

As the seller you should be able to negotiate the length of time into a reasonable zone (45 to 60 days). If the buyer is asking for more than 60 days, you should push back hard as it’s never in a seller’s interest to be locked up, especially for an extended period of time.  In addition, most deals should be able to be closed within 60 days from signing of the LOI, so having a reasonable deadline forces everyone to be focused on the actual goal (e.g. closing the deal.)

Since most no shops will be unilateral – the buyer has the right but not the obligation to cancel the no shop if they decide to go forward with the deal – this time window is particularly important since the seller is likely to be tied up for the length of the no shop even if the deal doesn’t proceed. Rather than fight the no shop, we’ve found it more effective to carve out specific events – most notably financings (at the minimum financings done by the existing syndicate) to keep some pressure on the buyer.