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In business, the term exclusivity refers to a party’s sole rights with regard to a certain business activity. This may include business relationships, pricing, products, or sales.
Another application of this term in the business world involves relationships between parties, most notably in the form of exclusivity agreements.
This post addresses how two forms of exclusivity agreements or clauses may be useful in:
- business acquisitions and mergers; and
- strategic business relationships between two or more parties
Exclusivity Agreements in a Business Acquisitions and Mergers
If you are preparing to buy or sell a company, it’s important to understand how an exclusivity agreement, or more typically an exclusivity clause, may impact the process.
When there is active bidding among several companies for the purchase of another company, an exclusivity agreement may be agreed upon when a potential buyer makes significant progress in the negotiations and is prepared to sign a letter of intent (LOI).
In the context of a business acquisition, this specific type of agreement usually stipulates that once a potential buyer signs the letter of intent (LOI), the seller cannot pursue another offer from a different potential buyer for a specified amount of time.
An exclusivity clause may not always be included in a letter of intent to buy a business. But from the perspective of the buyer, it is a good idea to include one. From the seller’s perspective, the opposite is the case.
The exclusivity agreement in the context of a business sale is often referred to as a ‘no-shop clause’ and will normally include a term or expiration date.
Exclusivity Agreements in Strategic Business Relationships
For business owners seeking opportunities to strengthen or grow their companies, an exclusivity agreement with another powerful player inside or outside of their market may have a big impact on both company’s capabilities. These kinds of strategic business partnerships are common and sometimes officially documented in the form of an exclusivity agreement.
This type of agreement requires both parties to agree to work exclusively with one another with respect to a certain aspect of their businesses. One famous example was AT&T’s exclusivity agreement with Apple to be the sole phone company to distribute the iPhone in its early years.
Exclusivity agreements are often created between a company and an important vendor or other crucial supply chain partner, or with a leader in another market. Both parties seek to accomplish a certain strategic objective by combining the most successful pieces of the respective businesses.
How an Exclusivity Agreement Works
Exclusivity agreements are designed to create a stable business relationship and beat out the competition, resulting in improved predictability and profitability. Generally it requires one or both parties to restrict some business activity with outside parties for a specified amount of time.
Other Things to Consider
Keep in mind that there are some drawbacks to exclusivity agreements.
First, whenever two businesses work this closely together, there is some amount of information each company will learn about the other, which competitors may find very valuable.
In these cases, confidentiality agreements may be necessary as well. Additionally, both parties may be obliged to pay a penalty in the event the relationship is terminated prematurely.