Including a No-Shop Clause in a Website Purchase Offer Letter
What is a no-shop clause?
A no-shop clause is occasionally included in an Offer Letter between a seller and potential buyer. This clause outlines in clear terms that the seller cannot solicit offers from any other buyers during a pre-determined time-frame while the buyer and seller are closing the sale.
A potential buyer includes this clause to prevent the seller from using his offer to shop the business around to get a better offer from another buyer. The clause always has an expiration date. After this date, the seller can shop the business around to other buyers.
As a seller, should you agree to a no-shop clause?
My advice to sellers is to never agree to a no-shop clause. The reason for this is a seller has no guarantee that the buyer will, in fact, close the deal. In most website deals, sellers do not receive proof of funds from buyers. And even if the buyer proves he has sufficient funds, he still has to to transfer these funds into escrow. He could change his mind and decide not to.
For any number of reasons, the deal could fall apart and the seller would have wasted time with a buyer who may never have been capable of buying the website. During this time, the seller could have been soliciting offers from other buyers.
One solution to mitigate this risk to the seller is to include a no-shop clause with as short a time-frame as possible. In this way, if the buyer doesn’t close the deal, the seller has wasted very little time.
An even better solution is for the buyer to place non-refundable good faith money in escrow during the term of the no-shop clause. This proves to the seller that the buyer is serious. This could be a nominal fixed sum like $1,000. Or it could be a very small percentage of the sale price agreed to in the Offer Letter. If the buyer fails to close the deal, these funds are transferred to the seller as compensation.
This is a break-up fee that compensates the seller for his time.
As a buyer, should you insist on a no-shop clause?
The risk to the buyer is that since a Letter of Intent is non-binding, the seller could shop the buyer’s offer around to get a better offer from another buyer.
The simple solution to this is for the buyer to allow the seller to shop the website business around, but clearly state in the LOI that the seller can solicit (but not accept) other offers as long as the buyer closes the deal by an agreed-upon deadline. After this deadline expires, the buyer’s offer expires, and the seller can accept other offers.
This deadline pushes the buyer to move quickly. And the seller can still solicit (but not accept) back-up offers prior to the deadline. If the sale doesn’t close, the seller can accept one of the back-up offers without having to start all over again.
A no-shop clause can play an important role in website deals. But it must be structured appropriately to reduce the risk to both the buyer and and seller.
Author: Kris Tabetando
Kris Tabetando provides mergers & acquisitions (M&A) advisory and brokerage services to Internet companies. He also partners with investors to acquire & manage Internet businesses.
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