Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How the No-Shop Clause Traps M&A Sellers Before the Deal Is Signed
Transcript
- Lucas: If you're selling a business, the no-shop clause is probably the first major legal restriction you'll sign — and most founders barely read it. Luna: They see exclusivity and think, 'Sure, the buyer wants a fair look.' But it's way more than that. Lucas: Exactly. A no-shop clause says: from the moment you sign the letter of intent, you cannot solicit, encourage, or even entertain another offer for your company. Not for a better price, not for a better structure. Until the deal closes or dies, you are locked in. Luna: And the lock-in can last months. I've seen 60-day and 90-day tails in mid-market deals. Meanwhile, the buyer takes its time. Lucas: There's a case from 2023 that I think about often. A B2B SaaS company in the Midwest — about $18 million in recurring revenue. They got an offer from a private equity-backed rollup. The LOI included a 90-day no-shop with a standard fiduciary out. Luna: Standard meaning the board can still consider a superior proposal if it comes in unsolicited? Lucas: Right. But here's the trap: the buyer had a matching right. So if a second bidder showed up, the original buyer got to match the terms. And the definition of 'superior proposal' was so narrow — higher cash price, same structure, same timeline — that almost nothing qualified. Luna: So the fiduciary out was effectively meaningless. Lucas: Exactly. And that's trap number one: the narrow fiduciary out. The seller thinks they have an escape hatch, but the buyer defines it so tightly that only a perfect, fully-financed, no-contingency offer triggers it. By the time you get one, the buyer usually matches within hours. Luna: Trap number two? Lucas: The tail period after the no-shop expires. Most sellers assume once the exclusivity period is over, they can shop the deal again. But many agreements include a 'standstill tail' — another 30 to 60 days where the buyer gets a matching right on any offer that the seller receives, even if it's from a party who wasn't in the data room during the no-shop. Luna: So you can't actively go out, but even if someone calls you, the buyer has first dibs. Lucas: Yes. And that kills your leverage with a backup bidder. No serious buyer wants to spend six weeks on due diligence only to get match-triggered at the finish line. So a lot of second bidders just walk. Luna: Which is exactly what happened in that SaaS deal? Lucas: It did. The original buyer dragged its feet on financing — took 110 days total. By then, a strategic competitor had approached the founder, but the matching-right tail was still active. The strategic bidder said, 'We're not going to bid against a matching right. Call us when it's dead.' So the founder was stuck. The deal closed, but at the original price, and the founder later told me they probably left $3 to $4 million on the table. Luna: Ouch. So what's trap number three? Lucas: The termination fee tied to the no-shop. Many LOIs say if the seller walks away to take a superior offer — even under the fiduciary out — they have to pay a breakup fee. Usually 3 to 5 percent of enterprise value. On a $50 million deal, that's $2.5 million in cash the seller has to write a check for. Luna: Which the second buyer can reimburse, but it complicates the economics. Lucas: Exactly. And some buyers even negotiate a 'specific performance' clause that lets them force the seller to close the deal — not just pay damages. That's rare, but it exists in some private equity LOIs. Luna: So if a seller signs a no-shop with specific performance, they literally cannot take a higher offer without being sued to close. Lucas: Correct. And it's enforceable in Delaware courts. So the no-shop can turn from a standard exclusivity clause into a near-absolute lock. Luna: Look, I want to pause here for a second — because this kind of detail is exactly why we do this show. If these conversations have moved your work forward in some small way, it's worth knowing that a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many episodes. Lucas: Yeah, it's true. No ads, no sponsors — just listener support. And it's a small group, but it keeps the lights on. Luna: Anyway — back to the no-shop. So what can a seller actually negotiate? Lucas: First option: a window-shop clause. The seller can actively solicit other buyers for a limited time — usually 30 to 45 days — before exclusivity kicks in. The buyer still gets its exclusive look, but the seller gets to test the market first. Luna: That feels fair. Most buyers will allow it if they're confident in their offer. Lucas: Right. Second option: a go-shop clause. That's where the seller can actively shop the company even after signing the LOI, usually for 30 to 50 days. The buyer gets a matching right, but the seller's banker can run a full process. Luna: Go-shops are more common in public company deals. In the mid-market, they're rare — buyers see it as a sign the seller isn't committed. Lucas: That's fair. But there's a middle ground: negotiate a shorter exclusivity period — 30 days instead of 90 — and a broader definition of 'superior proposal.' Maybe one that includes consideration mix, not just cash price. Luna: And cut the matching-right tail to zero or 10 days. Lucas: Exactly. And if the buyer insists on a termination fee, cap it at 2 percent, not 5. And push back hard on specific performance. Most private equity firms will drop that if you hold firm — they don't want to be seen as bullies in the market. Luna: What about the data room? Can a seller limit the no-shop to just the management presentation and not the full data room? Lucas: That's a good tactic. Some sellers agree not to solicit but still allow inbound interest to receive a limited set of diligence materials — maybe the CIM and financials, but not the customer contracts or IP files. That way a backup bidder can do preliminary work without getting a full run. Luna: So the backup bidder can decide if they want to be a serious option, but they're not getting a free ride on the buyer's diligence. Lucas: Right. And it keeps the process alive if the original deal falls apart. Luna: One thing I've seen work: sellers who bring a second term sheet to the LOI stage. Even if it's not as good, it changes the no-shop negotiation because the buyer knows there's heat. Lucas: That's smart. And it's consistent with the current market. Private equity dry powder is roughly $2.5 trillion right now. Buyers are aggressive. If a seller has a credible offer, they can push for a shorter no-shop. Luna: So the key takeaway: the no-shop isn't a formality. It's a structural decision that determines who holds leverage through the entire process. Lucas: And the moment you sign it without understanding the tail, the fiduciary out definition, and the termination fee, you've given away most of your bargaining power before the real negotiation even starts.