Exclusivity after a letter of intent. What it costs and why it should not last longer than ten weeks

On a Friday evening, in the seventh week of exclusivity, the owner of a mid-sized manufacturing company called me. That morning the buyer had brought him the due diligence report and a new price: PLN 88 million. The letter of intent had said PLN 100 million.

Of the PLN 12 million difference, the buyer attributed 7 million to adjustments to EBITDA, the operating profit on which the valuation had been calculated. It put another 3 million down to higher net debt and 2 million to working capital below the normal level. Only the first item came out of the due diligence. The other two came from a dispute over definitions that the letter of intent did not contain at all.

The owner had started with three offers: PLN 100, 94 and 91 million. He chose the highest and gave the buyer eight weeks of exclusivity. He signed the letter of intent in his car, between two meetings. When he wanted to go back to the other bidders, one of them had already bought a competitor and the other had moved its budget to the following year.

Exclusivity was then extended twice, because the share purchase agreement was not ready. The deal closed after sixteen weeks, at PLN 90 million. That is less than the lowest of the three offers he had started with.

Nobody broke any agreement here. The buyer had the right to change the price, because that part of the letter of intent bound no one. The seller had no right to talk to anyone else, because that part of the letter bound him in full. I have changed the details so that neither the company nor the parties can be identified, and I have rounded the figures. I have seen the mechanism many times.

What the seller actually signs

A letter of intent is a document in which the parties write down the terms on which they want to continue talking about a deal. It looks like a document about the price. The price takes up one paragraph and is almost always non-binding. Next to it sit provisions that are binding from the day of signing: confidentiality, costs, governing law and exclusivity.

The asymmetry is therefore written into the document itself. The buyer can change the price. The seller cannot change the buyer.

Exclusivity comes in two versions, and it is worth telling them apart. A ban on actively seeking other buyers, known as a no-shop, at least allows the seller to hear out someone who comes forward on their own. A ban on any talks at all, known as a no-talk, closes that route as well. On top of this there is often an obligation to tell the buyer that someone has been in touch.

Whichever side of the table I sit on, I propose the same thing: eight to ten weeks. That is enough for the buyer to examine the company thoroughly and for the parties to finish the share purchase agreement. Buyers sometimes ask for more, with an option to extend. Rarely does anyone ask why.

How the conversation changes, week by week

On the day of signing, the seller has the strongest position in the whole process. He has the highest offer and two more in reserve. The buyer knows that if it drops out, the conversation is over.

In the second and third weeks nothing changes on paper. The other bidders are told that the process is on hold. Their investment committees stop keeping a slot in the calendar for this deal. The teams go back to other projects, and one of them finds another company to buy.

Between the fifth and the seventh week the buyer completes its due diligence. It has got to know the company from the inside, while over the same period the seller has lost touch with the market. Knowledge has shifted to one side of the table. The buyer knows what restarting the process would cost the seller: two or three months and a loss of credibility. The market has a long memory for a company that someone examined from the inside and put aside.

This is when a new price appears, usually with a justification that is partly true. Then exclusivity formally expires. The buyer asks for an extension, because the share purchase agreement is not ready. The seller agrees, because he has nowhere to go back to. Exclusivity has taken away his ability to walk away from the table. Without that ability, the price falls almost by itself.

Why long exclusivity harms both sides

The buyer asks for long exclusivity because it believes it is buying itself peace and quiet. For the first ten weeks, it is. After that it starts paying, just as the seller does.

First, momentum is lost. The teams on both sides go back to their day-to-day work, and every meeting has to be arranged from scratch. Each extension means another round of changes to the share purchase agreement, and the law firms on both sides send more invoices.

Worse, the due diligence goes stale. A new quarter with weaker results or the loss of a single customer is enough for the report to need updating and the price to be recalculated. In the meantime the buyer’s commitment letter may expire: the bank’s conditional undertaking to grant a loan for the purchase.

The company itself pays too. For weeks on end the CFO and the chief accountant answer due diligence questions while day-to-day work waits. A weaker quarter during exclusivity gives the buyer another argument for a price cut.

Some deals fall apart this way, even though nobody wanted that. Axial, a US deal platform, analyzed 75 deals on its marketplace that in 2025 fell apart after a letter of intent had been signed. In 14.7 percent of cases the parties failed to agree a new price or structure after due diligence. In a further 10.7 percent, financing problems were the cause.

I once agreed to twelve weeks myself, because the buyer was well known and serious. We extended twice. Since then I have stuck to ten.

When the buyer is right

A buyer that moves on to due diligence spends real money. Financial, legal and tax due diligence, often technical and environmental as well, costs from several hundred thousand to more than a million zlotys in a mid-sized deal. On top of that come the team’s time and a reservation of bank financing. Nobody sensible will spend that money knowing that the seller is playing them off against two other bidders at the same time. A seller who refuses exclusivity is left with offers that nobody intends to stand behind.

Buyers’ advisers will say that ten weeks is too little for a company that has not prepared a data room, an organized set of documents made available to the buyer. They are right. That problem, however, is solved by the seller’s preparation. Longer exclusivity only puts it off.

Some price cuts after due diligence are fair. If due diligence finds fifteen people on self-employed (B2B) contracts who work like full-time employees, the price will fall with any buyer. I wrote about this in an article on due diligence by the buyer. Exclusivity does not create such problems. It decides whether the seller has anywhere to go when the buyer values a problem it has found at more than it is worth.

So exclusivity has to be given. What remains to be settled is for how long, and what the seller gets in return.

The law will not help much here. Under the Civil Code, a party that conducts negotiations contrary to good practice, in particular without the intention of concluding a contract, must compensate the loss the other party suffered by relying on the contract being concluded. A buyer that proposes a lower price after due diligence and still wants to buy can hardly be accused of sham negotiations.

The Code protects the confidentiality of information disclosed in negotiations, but it cannot undo what a competitor has learned in due diligence. That is why the margins on contracts with the most important customers are shown to a buyer from the same industry only after due diligence is complete, or only to its external advisers. Real protection for the seller comes only from the wording of the letter of intent.

The 10-3-5 rule

At Capital One Advisers we negotiate exclusivity according to the 10-3-5 rule. At most ten weeks, three interim deadlines and a 5 percent threshold, above which a price cut releases the seller from exclusivity. All of this has to be agreed before the letter of intent is signed, because a week later the seller no longer has anything to trade for these provisions.

The length is eight to ten weeks, with no automatic extension. A buyer that really wants to buy will manage in that time if the data room is ready on day one.

The interim deadlines set the pace. In week five the buyer delivers a written summary of the due diligence findings that, in its view, affect the price, because the advisers who examined the company do not release the full report to the seller. In week seven comes a draft share purchase agreement or comments on the seller’s draft, and in week eight confirmation of financing. Missing any of these deadlines ends exclusivity without further formalities. The deadlines run from the day the buyer was given access to the data room, so a seller who is late with documents pushes them back himself. Sample wording: “Exclusivity shall expire if the Buyer fails to deliver to the Seller a written summary of the due diligence findings by the end of the fifth week, a draft share purchase agreement or comments on the Seller’s draft by the end of the seventh week, or confirmation of financing by the end of the eighth week from the date on which the data room is made available to the Buyer.”

The price threshold changes the buyer’s calculation. If it proposes a price more than 5 percent lower, from that day the seller may go back to the other bidders. The buyer can still cut the price, but it knows that from that moment it is competing again.

The threshold has to be drafted broadly. A buyer that wants to pay less does not always cut the price outright. It can leave the price unchanged and move part of it into a deferred payment that depends on the company’s future results (an earn-out). Another way is to demand that part of the price go into an escrow account, that is, be frozen for a set period as security for any claims the buyer may have. A third is to widen the definition of net debt. That is why the threshold applies to the amount paid to the seller at closing, the day on which the price is paid and the shares pass to the buyer. Sample wording: “Exclusivity shall expire on the day on which the Buyer presents a proposal that reduces the amount payable to the Seller on the closing date by more than 5% compared with the amount calculated on the basis of the enterprise value and the definitions of net debt and working capital set out in this letter.”

Another owner agreed to eight weeks with such a threshold. In week six the buyer cut the price from PLN 100 million to 91 million, or by 9 percent. The next day the seller resumed talks with the second bidder. A week later the first buyer came back with a price of PLN 97 million, and the deal closed in week ten.

Extension and the price mechanism

Alongside the 10-3-5 rule, we negotiate two provisions in the letter of intent that are easy to forget. The first concerns extension: only once, only in exchange for something, and no further than week ten. Every extension is a new concession by the seller. It is worth trading it for confirmation of the price, a closed list of due diligence findings or a shorter timetable. If exclusivity starts at eight weeks, two are left for an extension. They are enough if all that is still missing is the signatures.

The second concerns the price mechanism. The offer in a letter of intent usually states the enterprise value, calculated as if the company had no debt and no surplus cash. The price for the shares that the owner receives is the enterprise value less net debt, adjusted for the deviation of working capital from its normal level. If the letter speaks only of the price, the dispute over these definitions will take place during exclusivity, that is, when the seller has the least bargaining power. In the case at the start of this article, it was the definitions that accounted for PLN 5 million of the 12 million cut the buyer demanded.

The owner of a manufacturing company regards his bank loan and machinery leases as debt. The buyer tries to count as debt some items that look like ordinary liabilities on the balance sheet: overdue supplier invoices, customer advances on orders not yet fulfilled, unpaid bonuses for the previous year. As long as they sit in working capital, they are part of the twelve-month normal level, so only the deviation from the average changes the price. Moved into net debt, they reduce the price in full, zloty for zloty. They then have to be excluded from working capital so that they are not counted twice.

It would have been enough to agree these definitions before signing the letter, even in three sentences. For example: “The price for the shares equals the enterprise value of [amount], less net debt and adjusted for the deviation of working capital from its normal level. Net debt comprises bank loans, other loans, finance leases and [list of items], less cash in excess of [amount] of cash needed to run the business. The normal level of working capital equals the average for the last twelve closed months before the signing of this letter, and the price is adjusted by the difference between that level and the level on the closing date.”

It is worth parting with the other bidders in a way that gives them a reason to come back: by telling them that the process is on hold and thanking them for their work. A bidder that nobody told anything will not pick up the phone six weeks later.

What exclusivity will not fix

The terms of exclusivity protect the seller from a buyer that exploits the lack of competition. Only preparation protects him from the problems of his own company.

If the company has a problem that will lower the price with any buyer, short exclusivity will not remove it. At most it will move the conversation about it to another buyer, who will find the same thing in the same week of due diligence. The seller will then lose two months and will not recover a single zloty.

What works best, then, is due diligence that the seller commissions himself before the information memorandum (the document describing the company for buyers) is written. A problem disclosed at the outset is seen by all the bidders, and they price it while competing with each other. The same problem found in week six of exclusivity is priced by a single buyer that no longer has any rivals. A seller who knows his EBITDA adjustments, arrears and risks before anyone signs a confidentiality agreement also shortens the buyer’s due diligence. I wrote about the quality of earnings review separately. That is why at Capital One Advisers we agree the terms of exclusivity with the owner long before the first buyer sees the memorandum.

The tenth week

The same arithmetic applies to any exclusivity: to the preliminary terms of an investment (the term sheet) agreed with a venture capital fund, to an exclusive mandate for a single bank and to talks with a sole supplier.

Eight to ten weeks is my answer to the question of length. The harder decision comes in week ten, when the agreement is almost ready and the buyer asks for three more. Breaking off talks at that stage means going back to bidders who have spent the last ten weeks on something else. Agreeing without conditions teaches the buyer that the timetable binds only the seller. Some advisers always extend when the agreement is ready to sign. I extend when the buyer gives something in return, for example by confirming the price in writing. Refusing makes sense only if the seller really is prepared to end the talks, even though by week ten both sides have already borne the whole cost of due diligence and most of the negotiations.

Service: M&A advisory on a company sale