Definition
An exclusivity period is a set time during which the seller agrees not to market the business, share information with or negotiate with any other buyer. It is sometimes called a no-shop. It usually sits in the letter of intent (heads of terms in the UK), and is often one of the few parts of that document intended to be legally binding. It protects the money and time you spend on due diligence, finance and legal work.
A letter of intent sets out the main terms on which a buyer proposes to acquire a business, before due diligence and the full purchase agreement. In the UK the equivalent is usually heads of terms.
Heads of terms is the UK name for a short document recording the main commercial terms of a deal before the legal documents are drafted. It is the equivalent of a US letter of intent.
Worked example
Kestrel Point Marina is a fictional Australian business. The heads of terms give the buyer 60 days of exclusivity.
By day 50, diligence is finished but the lender has not yet given final approval. The buyer asks for another 30 days. The seller agrees, on condition that the buyer commits to a firm completion date and shares the lender's written progress update.
Why buyers care
Without exclusivity, you can spend heavily on accountants, lawyers and lenders, then lose the business to another bidder who benefits from your work. With too short a period, you may not finish in time. With too long a period, the seller may resist or lose patience.
Set the length from a realistic timetable for diligence, financing and drafting the purchase agreement. Agree how an extension works and whether the seller must tell you about approaches from other buyers. Remember that exclusivity stops the seller talking to others; it does not oblige either side to complete the deal.