The formulas, tricks and trade secrets of Private Equity

Exclusivity Proposal

Sample Chapter

As discussed in Term Sheet Treatise, the purpose of a term sheet is to propose deal terms and value. But, another underlying purpose of the term sheet (for the private equiteer) is to secure exclusivity over the deal. The exclusivity clause, which is often the only legally binding clause in the term sheet, bars the vendor from pimping the deal to other competitive parties.

In some cases, vendors approach private equiteers to confirm a price offered by another party. The vendor doesn’t intend to proceed with the private equiteer; they simply want to ensure they’re getting a good price from the other party. Sometimes, this could lead to an actual investment, but sometimes pigs can fly too. It’s relatively safe to say that these situations always waste time; hence, the exclusivity clause.

Of course, the vendor can do whatever they want in practice, irrespective of what a piece of paper dictates. And even when the clause is legally binding, the fact is, there’s very little recourse for the private equiteer. However, term sheets are Darwinian in nature and have evolved to include breach fees within the exclusivity clause. If the vendor solicits the deal to another party within a predetermined period (often 45 days), they are asked to pay the fee. The vendor can wait for the period to lapse, but the fee still works as a great filter.

I say this because it verifies if a party is serious about a deal. And, suffice to say, a private equiteer only wants to deal with serious vendors. With that said, I also wonder how many deals fail due to the imposing nature of the breach fee. These fees can easily get into the millions of dollars, so they can be quite off-putting. But, you win some, you lose some. As your time in private equity passes and you become jaded by losing deals that were never deals in the first place, you won’t mind the odd false positive.

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