Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How the Letter of Intent Lockup Traps M&A Sellers
Transcript
- Lucas: You get the Letter of Intent. You pop champagne. You think the hard part is over. Luna: And then the buyer drags their feet for sixty days, asks for a price cut on day fifty-nine, and you can't talk to anyone else. Lucas: That is exactly the trap we're talking about today. The LOI exclusivity clause — or the 'no-shop' provision — is one of the most dangerous pieces of paper a seller signs, and most founders treat it like a formality. Luna: A formality that can cost them the deal, or worse, their leverage. Lucas: Right. So let's anchor this in a real case. I'm thinking of a mid-market SaaS company I saw last year — let's call it CloudGrid. About $15 million in recurring revenue, growing 25 percent year-over-year. A middle-market PE firm came in with a LOI at 11 times EBITDA, which was generous. Sixty-day exclusivity, standard language. Luna: And what happened at day sixty? Lucas: They hadn't completed financial due diligence. The buyer claimed they found a 'revenue recognition issue' — which was really just a timing difference on a few multi-year contracts. They asked for a 15 percent price reduction. CloudGrid's CEO had already stopped talking to a strategic buyer who'd expressed interest earlier. He had no Plan B. Luna: So he took the haircut. Lucas: He took it. And the strategic buyer had already moved on. That's the lockup. The exclusivity clause is designed to protect the buyer's deal expenses — but it also hands them a weapon. If they can drag you past the point where other buyers have cooled off, you're negotiating from a deficit. Luna: Walk me through the typical language. What does a standard no-shop actually say? Lucas: Standard language says the seller agrees not to solicit, initiate, or participate in any discussions about an alternative transaction. That includes sharing information. It usually runs thirty to ninety days. And it often has a 'matching right' — meaning if a second buyer emerges, the first buyer gets to match the offer. Luna: So even if you find another bidder, the first one can stay in the game by matching — which can scare off the second bidder. Lucas: Exactly. The matching right creates a chilling effect. Now, the seller's first mistake is signing an LOI that doesn't have a 'fiduciary out' — a clause that lets the board consider a superior proposal, even during exclusivity. If you're a private company with a board, you can negotiate that in. But many sellers don't even ask. Luna: What does a fiduciary out look like on paper? Lucas: Something like: 'Notwithstanding the exclusivity provisions, the company may furnish information to and engage in discussions with a third party that makes an unsolicited bona fide written acquisition proposal if the board determines in good faith that such proposal is reasonably likely to lead to a superior proposal.' It's a carveout. Critical. Luna: And the buyer pushes back on that, right? They say, 'We need certainty.' Lucas: They will. But it's negotiable. The buyer's real concern is that you'll shop the LOI to drive up the price. You can address that by adding a 'matching right' that only kicks in if a third party actually delivers a signed definitive agreement — not just a letter. That gives the buyer comfort while preserving your optionality. Luna: So you're not asking them to waive exclusivity entirely — just to narrow it. Lucas: Exactly. Second mistake: no ticking fee. A ticking fee is a per-day payment to the seller if exclusivity extends beyond a certain date. Say, after forty-five days, the buyer pays you ten thousand dollars a day until they close or walk. It aligns incentives. Luna: A ticking fee forces the buyer to treat the timeline seriously. Lucas: Yes. If they know it costs them money to stall, they'll move faster. And if they refuse a ticking fee, that tells you something about their intentions. Luna: What's the third mistake? Lucas: The third mistake — and this one is subtle — is agreeing to a broad definition of 'confidential information' in the LOI. Because during exclusivity, you're sharing everything: customer lists, employee compensation, your product roadmap, your IP details. If the deal falls through, the buyer walks away with that data and no obligation to return it — or worse, they can use it to compete. Luna: But isn't that covered by a separate NDA? Lucas: Usually, yes. But the LOI often supersedes or modifies the NDA. You need to check that the NDA survives the LOI, and that the definition of confidential information isn't watered down. I've seen LOI language that says 'information that is independently developed' is not confidential — and the buyer can claim they independently developed your customer list. Luna: That's terrifying. Lucas: It is. And it's enforceable if you sign it. So the fix is simple: in the LOI, include a sentence that says the previously signed NDA remains in full force and effect and is not amended by this agreement. That way, your data stays protected. Luna: Okay, so three things: fiduciary out, ticking fee, preserve the NDA. Anything else? Lucas: One more, if you can get it: limit the scope of the no-shop to specific buyers. If you're already in talks with two other parties, you can carve them out. Say, 'The exclusivity applies to all third parties except the following identified potential acquirers.' That keeps your options open without violating the spirit of the LOI. Luna: And the buyer might accept that if they know you had existing conversations. Lucas: Right. And it's honest. Now, the bigger picture here: the LOI is not the finish line. It's the starting gun for due diligence. And the seller who treats it as a binding commitment — rather than a conditional offer — is the seller who gets trapped. Luna: You mentioned earlier that the buyer's deal expenses are the justification for exclusivity. How much are they actually spending? Lucas: In a mid-market deal, the buyer might spend two hundred to five hundred thousand dollars on legal, accounting, and advisory fees during exclusivity. That's real money. So they do have a legitimate interest in not having you shop the deal while they're spending that. But that doesn't mean you should give them unlimited time. Luna: So a reasonable compromise might be a shorter exclusivity period — say thirty days instead of sixty — with a one-time extension option if both parties agree. Lucas: Exactly. Thirty days is enough for a buyer to confirm the key assumptions. If they need more, they can ask for a week or two, and you can grant it. But the default should be shorter. Luna: Does this happen more with financial buyers or strategics? Lucas: Both can do it, but the dynamic is different. Strategic buyers — companies that want to buy you for your technology or market share — they usually have a clearer timeline. They know what they want. Private equity firms, on the other hand, are more likely to use exclusivity to run a parallel process — they'll tie you up while they try to find a co-investor or line up debt financing. If the financing falls through, they walk. Luna: And you've wasted weeks. Lucas: And you've lost momentum. Your employees get nervous, your customers sense uncertainty, and your revenue might dip. That's real damage. Luna: So what's the one thing you'd tell a founder who's about to sign an LOI? Lucas: Read the exclusivity clause like it's the most important paragraph in the document — because it is. And then negotiate the three things we talked about. If the buyer balks, ask yourself: if they're not willing to give you a fair exclusivity structure now, how will they behave when the real pressure hits? Luna: That's a good litmus test. Lucas: Honestly, if today's conversation moved the needle for you — even a little — consider tossing a coffee our way. We keep this thing ad-free, and listener support is what makes that possible. The link is buy me a coffee dot com slash fexingo. Luna: It's a small gesture that helps us keep digging into these deal mechanics. And we genuinely appreciate it. Lucas: So back to the trap: the LOI lockup doesn't have to be a trap. You just have to see it coming. Next episode, we'll talk about another early-stage document that sellers often sign without thinking — the term sheet for a minority investment. That one has its own set of landmines. Luna: Looking forward to it.