During an exclusive negotiation period (also referred to as a “lockout term” or even a “no-talk period”), parties agree not to enter into negotiations with any third parties with respect to the subject at hand.  For example, companies exploring an acquisition commonly insist upon such agreements so they can do their due diligence and decide whether to move forward with the deal without having to worry about another suitor swooping in and poaching the target.  So are exclusivity periods a good thing?  As with many things in business and law, it depends.

The Harvard Program on Negotiation blog recently featured an insightful article on this subject, “Understanding Exclusive Negotiation Periods in Business Negotiations: A Strategy That Can Smooth the Dealmaking Process,” adapted from “Hands Off! Negotiating Exclusivity” by Guhan Subramanian (2005).  The article is definitely worth a read, as it explains the various ways that exclusivity periods can facilitate deals.  Below, a summary:

  • Establishing clear deadlines. By establishing a deadline to seal the deal, exclusivity periods force the parties to be up front about their “best and final offer.”  There’s simply no time to implement a strategy of offering minimal concessions at a snail’s pace (which I generally think is ineffective anyway).
  • Signaling an intent to make the deal. A party that agrees to an exclusivity period is telling the other side that they believe a deal is possible (what the Harvard Program on Negotiation calls “ZOPA,” or zone of possible agreement).  A party who’s iffy about making a deal isn’t going to waste time agreeing to an exclusivity period; they’re going to want to keep all options open.  Therefore, agreeing to an exclusivity period can create a sense of trust between the parties as they work to negotiate a deal.  The article cites a great example of NBC and Paramount Television agreeing to a 30-day exclusivity period when negotiating renewal of “Frasier” in 2001 – by agreeing to the exclusivity period, the parties were essentially acknowledging that the show belonged on NBC – they just needed to figure out how to make it happen.
  • Minimal effect on BATNA. I am a huge proponent of figuring out my “BATNA” before entering a negotiation – my best alternative to a negotiated agreement.[1]  Your BATNA is the most advantageous course of action you can take if the negotiation falls apart, and helps set the parameters of the discussion.  While an exclusivity period can worsen a party’s BATNA (since that party can’t freely seek out alternative third parties if a negotiation isn’t going well), the other side is facing the same issue.  So an exclusivity period with a reasonable time frame generally won’t harm either party’s bargaining power.

Of course, the effect of an exclusivity period on your negotiation depends on which side of the table you’re on.  A buyer with few options or with a laser focus on acquiring a particular company would find great value in an exclusivity agreement, while a seller being courted with multiple offers might be taking a bigger risk.  As with any negotiation, careful preparation is key before signing on the dotted line.

http://www.pon.harvard.edu/daily/dealmaking-daily/understanding-exclusive-negotiation-periods/

[1] Roger Fisher, William L. Ury and Bruce Patton, Getting to Yes: Negotiating Agreement Without Giving In (Penguin Books, 1991).