I typically advise my clients to have a binding no-shop in the Letter of Intent. This will ensure that the seller cannot try to find a better deal somewhere else, once the LOI is signed.
Sellers may insist on including a go-shop clause, which provides a certain period of time (usually around 50 days) to see if they can find a better deal.
Go-shops do not always yield higher-paying deals; in fact, the opposite may be true. According to The Wall Street Journal, deals in which targets insisted on go-shops were generally 24-62% lower than deals that weren’t shopped. Both Smithfield Foods and Rue21 recently failed to find better deals than the original offers.
The Wall Streeet Journal suggests buyers may hold back on price when go-shops are included. This makes perfect sense to me. If you’re going to spend the time and resources to execute a LOI and move into performing due diligence, you don’t want the seller shopping for a better deal. If the seller does insist on a go-shop clause you may offer a lower price to compensate for the uncertainty.
Of course, there may be times when go-shops are appropriate. A go-shop clause may quell the dissent of minority shareholders who aren’t convinced that your deal is the best one out there. If after 50 days the majority owner informs them that there was no better deal, the rebellion stops. In effect, this is what Dell did earlier this year. However, shopping around did not yield any better deals than the original offer from Michael Dell & Silver Lake Partners.
