Why granting exclusivity only makes sense if the buyer truly invests in due diligence
Quid pro quo
One of the most uncomfortable moments for a seller in an M&A process is granting exclusivity to a buyer for the typical 60 or 90 days.
It means stopping conversations with other interested parties, slowing down competitive tension between bids, and opening the company up completely to a single buyer, with no guarantee of closing.
That discomfort is understandable. But exclusivity is not a whim. It has a very specific purpose and, when used properly, it is the mechanism that allows the buyer to carry out a serious and in-depth due diligence process—where the real value for all parties actually lies.
To understand this, it is enough to look at how a well-structured sale process works.
As advisors, we contact several buyers, share an information memorandum after an NDA is signed, and after meetings and additional Q&A, we receive offers in the form of letters of intent.
When the process works well, there are several offers on the table. These are negotiated, and the seller chooses the buyer that best fits.
That buyer then issues a final letter of intent, setting out the economic terms and key elements of the transaction, in an offer that is typically non-binding and subject to due diligence.
Why is the offer subject to due diligence?
Because at that point, the buyer has not yet been able to verify the company in depth. In practice, the buyer has only had access to a single document (an information memorandum of around 50 pages) and to a few meetings with the owners, but has not been able to verify, among other things:
All of this can only be properly analysed through a due diligence process.
After the acquisition, any issue that arises will be the buyer’s responsibility. That is why the buyer wants to protect itself and will not make a final offer without having analysed the company thoroughly.
This is completely normal. However, in practice, all offers subject to due diligence include a request for exclusivity. The buyer submits a non-binding offer and, at the same time, asks the seller not to negotiate with any other potential buyers for two or three months—despite the discomfort and risk this entails for the seller.
At first glance, this may seem unfair
From the seller’s point of view:
If the transaction falls through, when the seller reconnects with previously discarded buyers, it is not always clear whether they are still interested or, if they are, what negotiating position the seller will be in.
So why do we accept this in well-structured processes?
Why is exclusivity a quid pro quo?
Exclusivity is granted in exchange for a meaningful investment by the buyer in the due diligence process.
In our experience, a serious buyer:
A key data point: in smaller transactions (with enterprise value below €10 million), due diligence can cost the buyer around €100,000, and in structures with multiple international subsidiaries it can easily scale into the hundreds of thousands of euros.
This level of investment is precisely the argument buyers use to request exclusivity. The logic is that, in order to commit to spending that money and allocating internal resources for several weeks, the buyer needs assurance that the seller is not negotiating in parallel with other buyers.
That said, for this reasoning to be valid, the investment in due diligence must be real. Exclusivity only makes sense when the buyer is genuinely willing to put that money on the table and analyse the company in depth.
In a proper due diligence process, the buyer typically relies on top-tier audit and legal firms, ranging from the Big Four (Deloitte, PwC, EY, KPMG) to well-recognised second-tier firms (BDO, Grant Thornton, RSM, Crowe), as well as leading law firms such as Garrigues, Cuatrecasas, Ecija, Uría Menéndez, Pérez-Llorca or Gómez-Acebo & Pombo.
This level of advisors implies cost, time and real commitment—and that is precisely what gives meaning to the exclusivity granted by the seller.
From here, the balance is clear.
The buyer invests money and resources in a thorough due diligence process, while the seller invests time and effort, turns down other offers, and grants exclusivity for 60 to 90 days so the buyer can analyse the company down to the smallest detail.
This is the true quid pro quo
This point is particularly important and is one we insist on explaining to sellers.
The seller grants exclusivity precisely so that the buyer can carry out a complete and in-depth due diligence. In return, the seller can—and should—require that the liabilities, time limits and warranties included in the share purchase agreement are consistent with the risks actually identified during that due diligence.
When specific risks are identified, they must be:
The seller must be able to rebut them with data and arguments (for example, regarding the real likelihood of a fine arising from a social security contingency or a potential data protection breach).
These specific risks are reflected in the contract in a dedicated section known as Specific Indemnities, where the seller’s liability is clearly defined and limited—either on an unlimited basis for that specific risk or capped at an agreed maximum amount.
Outside these specific risks, general warranties should be limited to a reasonable level that allows the seller to use the proceeds normally, without the concern of having to respond with the full purchase price for several years.
A well-executed due diligence allows both parties to assess real risks and negotiate in good faith the level of warranties (and, in some cases, guarantees or escrows) based on concrete facts.
That is why we insist that a professional and in-depth due diligence is just as important for the seller as it is for the buyer.
When there is no quid pro quo
By contrast, it makes no sense to sign an exclusivity agreement if the buyer does not fulfil its part of the deal. If the buyer does not invest seriously in due diligence—in terms of time, resources and high-quality advisors—and does not analyse the company with the aim of narrowing warranties to real risks, exclusivity completely loses its purpose.
There is no quid pro quo.
In the absence of rigorous due diligence, the buyer will tend to demand virtually unlimited warranties, simply because it has not been able to assess the risks. When risks are not properly identified, the natural reaction is to try to cover 100% of possible scenarios.
In practice, this means that the seller will not be able to freely dispose of the proceeds until the liability periods expire, which typically extend up to five years for tax, labour and social security matters.
Clear red flag: when a buyer asks for exclusivity but is not willing to invest seriously in a professional and in-depth due diligence process (no limited reviews or red-line due diligences), the problem is not exclusivity—the problem is the buyer
By Joshua Novick, partner at Bondo Advisors
Source: https://www.joshuanovick.com/p/exclusividad-y-due-diligence-el-quid
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