Private Equity Exclusivity Agreement: What you need to know

Private equity firms are investment firms that acquire majority shares in private companies. They provide the capital needed for growth and development in return for a stake in the business. Once a private equity firm identifies a potential investment opportunity, the firm may require that the company sign a private equity exclusivity agreement.

What is a private equity exclusivity agreement?

A private equity exclusivity agreement is a legal document that stipulates a period during which a company cannot solicit or accept investment from another private equity firm or investor while the first private equity firm conducts due diligence to determine whether to invest in the company.

This agreement ensures that the private equity firm has enough time to evaluate the investment opportunity thoroughly without competition from other investors. The exclusivity period typically lasts between 30 and 90 days, but can be extended to a maximum of six months.

What are the benefits of a private equity exclusivity agreement?

For private equity firms, exclusivity agreements provide assurance that they are the only firm conducting due diligence on a company. This prevents other potential investors from swooping in and investing in the company after significant time and resources have been spent evaluating the investment. Exclusivity agreements also protect the potential investment opportunity from being shopped around to competing private equity firms for a higher offer.

For companies seeking investment, exclusivity agreements serve as a commitment from a private equity firm to invest in the business if it meets the firm`s criteria. It also ensures that only one potential investor is evaluating the business at a time, reducing the stress and distractions that can arise from multiple investors conducting due diligence simultaneously.

What should you consider before signing a private equity exclusivity agreement?

Before signing an exclusivity agreement, it`s essential to ensure that the private equity firm is a good fit for the company`s vision and goals. Evaluate the firm`s investment track record, approach to managing companies, and the level of involvement the firm intends to have in the business.

Additionally, review the terms of the exclusivity agreement to ensure that the time frame allotted for due diligence is reasonable. A long exclusivity period can delay potential investment opportunities from other private equity firms or investors.

In conclusion, a private equity exclusivity agreement is a valuable tool for both private equity firms and the companies seeking investment. It provides a guarantee that the investment opportunity will be evaluated thoroughly without interference from other investors. However, it`s essential to review the terms of the agreement carefully before signing to ensure that it aligns with the company`s goals and timeline.