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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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The No Shop Clause

Comments (6)

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.

  • Phil Hanson

    “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.”

    Maybe you could elaborate here…?

  • http://www.feld.com Brad Feld

    The main thing to try to carve out is a financing. The buyer doesn’t want you to “shop your deal around to other buyers”, but in most cases they should be willing to let you do a financing, especially if you are low on cash. Interestingly, a lot of buyers want control / visibility into any financings, which causes a carve out like this to be negotiated (rather than a no-brainer give on the part of the buyer.)

  • http://www.dresseslife.com dresses

    The main thing to try to carve out is a financing. The buyer doesn't want you to "shop your deal around to other buyers", but in most cases they should be willing to let you do a financing, especially if you are low on cash. Interestingly, a lot of buyers want control / visibility into any financings, which causes a carve out like this to be negotiated (rather than a no-brainer give on the part of the buyer.)

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