No Shop Clause - Explained
What is a No-Shop Clause?
Written by J. Mance Gordon
Updated at April 20th, 2024
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What is a No-Shop Clause?
A no-shop clause is a clause included in an agreement or letter of intent between a seller and a prospective buyer that states the seller wont solicit, discuss, or negotiate with other potential buyers in a given period of time. This clause restricts the seller from accepting any alternative acquisition proposals for the asset or business.
How does a No-Shop Clause Work?
Buyers enter into such agreement to ensure the seller does not negotiate a sale with anyone else in that period of time. The sellers generally try to avoid a long no-shop period as the buyer may exit from the deal after completing due diligence. This delays the process of selling for them. The sellers accept a no-shop clause only when there is no other choice to move forward a deal. A potential buyer avoids a bidding war by entering into such an agreement. The price of the asset may rise if there are other interested purchasers.
A no-shop clause limits the scope of the seller to raise the selling price of the asset. A no-shop clause is very common in the letter of intents as the buyers expect a period of exclusivity before closing a deal. The typical time period of a no-shop clause is between 45 days and 90 days.
Milestone dates may also be included in the clause when the seller can check the progress towards closing the deal. Anonymity is an influential element in a high-stakes transaction. The seller agrees to accept the no-shop term as a gesture of good faith toward a buyer. A buyer with a strong position always includes this term in a letter of intent.
During the no-shop period the buyer evaluates the deal and does the due diligence. As a strong buyer offers a good deal the seller agrees to this term.
A no-shop clause is a protection mechanism used by the buyers to enhance certainty in closing the deal. It protects their investment of time, fund and resources they use for evaluating a deal. It takes some time for the buyer to finalize an acquisition or merger deal. Without a no-shop clause the seller may negotiate the deal with other potential buyers and if the seller succeeds to find a better deal the buyer may lose all their money and resources invested in evaluating the deal.