A founder I had worked with through two earlier financings called me on a Sunday morning. He had signed a letter of intent on Friday with a strategic buyer in his space — a number he was happy with, a structure that worked, a timeline that seemed reasonable. He had used his investment banker’s counsel for the LOI markup. Saturday afternoon, the head of M&A at his largest competitor had reached out through a mutual board member to express “very serious interest, at minimum what the other buyer is at and probably more.” The founder wanted to know if he was allowed to take the call.
I asked him to send me the LOI. The no-shop clause was four lines. Ninety days, no contact with any other potential acquirer, no providing information, no soliciting offers — and no fiduciary termination right at all. The competitor’s call was at minute one of day three of those ninety days. The founder was already in breach if he picked up the phone.
This is a conversation I have had more times than I would like. Founders walk into LOIs treating the price and the structure as the negotiation, and treating the no-shop, the deal protections, and the exclusivity mechanics as the boilerplate. They are not boilerplate. They are the second negotiation, and in markets like the current one — where competitive interest in a target can develop in days, not weeks — they are often more consequential than the price negotiation.
What the no-shop actually does
The no-shop, or exclusivity clause, in an LOI is the buyer’s protection against the seller running a parallel auction once the buyer has committed to spend real money on diligence. From the buyer’s perspective it is reasonable. Diligence on a private company is expensive — accountants, lawyers, industry consultants, often a Q-of-E exercise that runs into six figures by itself — and the buyer wants assurance that the seller is not going to use that diligence work to extract a better bid from a competitor. The no-shop converts the LOI from a non-binding indication of interest into a partial commitment from the seller’s side: the seller is committing not to shop the deal, even though the rest of the LOI’s price and structure terms are explicitly non-binding.
The clause has three knobs. The first is the exclusivity period — the duration the seller is locked up. The second is the fiduciary out — a carve-out that lets the seller engage with an unsolicited competing offer in limited circumstances, usually framed around the board’s fiduciary duties. The third is the superior proposal mechanics — what the seller has to do if a better offer materializes, including any match rights and break fees the buyer might receive on termination.
Most LOI no-shops have a long period, no fiduciary out, and no superior proposal mechanics. Most founders sign them. Most of the time, no other bidder shows up and the question never arises. But “most of the time” is the wrong frame. The right frame is: what does this clause cost me if a real competitor surfaces, and how much would I have had to give up at the table to keep my options open? The answer is usually less than founders think.
The exclusivity period is too long by default
Sixty and ninety days are the default exclusivity periods in middle-market LOIs, with ninety being more common when the deal is complex or the buyer is doing serious diligence. The default exists because buyers anchor on it and seller-side counsel rarely push back. But the right number depends on the diligence the buyer actually has to do.
A strategic buyer that has been watching the target for two years, knows the customer base, and has a clear internal mandate for the acquisition does not need ninety days. Forty-five is usually plenty, and thirty is doable. A financial buyer running a leveraged structure with debt financing to arrange will need longer, but even there, sixty-with-a-thirty-day-extension is a more honest deal than ninety-flat. The asymmetry founders should notice is that an extension provision — “exclusivity may be extended by mutual agreement” — gives the seller a check-in point at sixty days where the buyer has to demonstrate progress to keep the lockup. Without the check-in, the seller is committed to ninety days regardless of whether the buyer is actually doing the work.
The drafting move is to ask for the shorter base period with an extension mechanic, not to ask for the longer base period. Buyers understand the asymmetry and most will accept it once they have to articulate why they need ninety flat days for a deal where they have been in the data room for six weeks already.
The fiduciary out is the clause that matters most
Founders running C-corporations have fiduciary duties to their stockholders, and a no-shop that purports to override those duties is unenforceable at the margin — but only at the margin. The mechanics of the fiduciary out are what give the founder a real, contractual path to engage with an unsolicited competing offer without litigating about whether the no-shop is enforceable.
A clean fiduciary out has three pieces. First, the seller can respond to an unsolicited bona fide written acquisition proposal — meaning the seller did not solicit it, the proposal is in writing, and it is more than a vague expression of interest. Second, the board has to determine, in good faith and after consultation with counsel, that the proposal is reasonably likely to lead to a superior proposal. Third, the seller can then provide information and engage in negotiations with the third party, subject to a customary non-disclosure agreement that mirrors the protections in the buyer’s LOI. The protections matter — without the matching NDA condition, the buyer’s diligence becomes a weapon a competitor can use to underbid the buyer’s own work.
The buyer’s resistance to a fiduciary out is real but negotiable. Most experienced M&A buyers will accept some version of a fiduciary out in exchange for a tighter set of triggers and a break-fee mechanic. The negotiation is not whether to have the clause; it is how it is triggered, what counts as a superior proposal, and what the seller has to do procedurally if it intends to switch deals. The founder’s perspective on deal protection mechanics is consistently that the fiduciary out is a price term, not a procedural term — and it should be negotiated with that framing.
Superior proposal mechanics and the right kind of break fee
If a fiduciary out triggers, what happens next? The well-drafted LOI says: the seller has to give the buyer notice of the superior proposal, the buyer has a defined window — usually three to five business days — to match or improve its offer, and if the buyer matches, the seller has to engage with the buyer at the new price. If the buyer declines to match, the seller can terminate the LOI and proceed with the third party, subject to a break fee.
The break fee in an LOI is structurally different from the break fee in a signed merger agreement. In the merger agreement context, break fees often run 2 to 4 percent of equity value. In the LOI context — where the seller is terminating a non-binding indication, not a signed deal — the break fee should be much smaller, calibrated to the buyer’s actual out-of-pocket diligence costs rather than to an opportunity-cost measure. A break fee of “actual documented diligence expenses up to a cap of $250,000” is reasonable. A break fee tied to deal value at the LOI stage is overreach.
Founders who sign LOIs with merger-agreement-style break fees are giving up real money for protections the buyer has not earned yet. The buyer is going to spend on diligence either way; the question is whether the seller is also writing the buyer’s deal-cost insurance policy. The answer should usually be no.
The conversation to have with your banker
Investment bankers running middle-market sale processes are excellent at the price negotiation. They are less consistently excellent at the deal protection negotiation, partly because their compensation is tied to a closed deal — meaning the banker has an interest in any signed deal closing, not necessarily in preserving the seller’s optionality if a better bidder surfaces. This is not a knock on bankers. It is a structural observation about whose interests are aligned at which stage.
The founder’s job is to make sure someone in the room is thinking about the deal protections with the founder’s interests in mind. That is usually the founder’s M&A counsel, and the conversation needs to happen at the LOI stage, not at the merger agreement stage. By the time the merger agreement is being drafted, the no-shop has already done most of its work; the optionality the seller had at LOI-signing has already been spent.
The right pre-LOI conversation is not adversarial. It is calibration. How likely is a competing bid? How long does this buyer actually need for diligence? What is a reasonable break fee given the buyer’s investment in the process? Once those numbers are real, the no-shop terms write themselves. Founders thinking about deal structure should treat the LOI as a serious legal document, not as a placeholder for the eventual merger agreement.
If you are a founder evaluating an LOI, or one who has just received an inbound from a competitor while under exclusivity with someone else, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
— John
