As we discussed in prior installments, dealing with only one buyer can be a disaster, and is the biggest single mistake that sellers make. One of the major reasons is that a sellers biggest single tool to control the deal timing is a No Shop - but it has no teeth in a single suitor scenario. This clause is embedded in any professionally prepared Letter of Intent (LOI) which has to be in place to proceed with due diligence, closing documents, and payment. And, because of Sarbanes Oxley legislation, all US deals must now go through more extensive due diligence theres no way around it.

The No Shop is usually for a limited period of time, say 60 90 days. It says that you will not secure other offers or even talk to other buyers while the purchaser goes through the time and expense of doing their part to complete diligence, prepare the documents for closing, and get the deal done i.e. paid. In most transactions, it is the most important leverage you have in the LOI; for if the buyer doesnt get it all done, then you can talk to other parties, get other offers, and walk away. It is a real incentive for the buyer to not waste tens of thousands in legal, accounting and staff fees doing due diligence, and to push these professionals, who without prodding can take forever to get things done (especially the lawyers!).

Since the seller has no other interested parties, this No Shop has no teeth. The buyer knows it and so do their professionals. Even if it expires, they know it takes months to get other parties to the point of making an offer, and since you couldnt legally talk to other potential suitors, you just have to extend the No Shop clause another month or so, all the while having your companys energy sucked dry by what can be an exhausting due diligence process, one that can hurt, even destroy, your company!

But, more on that next week in Part 5, Due Diligence Nightmares.