Selling your company is fraught with potential pitfalls. Understanding the value of your business and assets, reading the market and managing bids can be a difficult process, particularly for the unfamiliar. There is, however, one mistake that owners make when selling their business that accounts for the highest amount of lost sale proceeds; proprietary deals.
Understanding how these deals work will help you avoid falling victim to them and get you the best value for your business.
What is a proprietary deal?
A proprietary deal – often called a prop deal – occurs when an acquiring company convinces an owner to sell their business outside of a competitive marketplace. The acquirer will invest a lot of time and energy in becoming a friend and industry colleague and by creating an atmosphere of trust, the acquirer will offer weaker terms because they know no one else is bidding.
Many founders and business owners become targets of proprietary deals in ways that on the surface, don’t seem shady or nefarious. Acquiring executives will invite targets out to lunch, wine and dine them and play a supportive, friendly role. You may exchange high level financials, which is appropriate to ensure you’re on the same page. It’s here that business owners, to no fault of their own, say or share something that can be used against them.
They may divulge a piece of information, like earnings and revenue or outstanding debts, that acquirers can use to craft prop deals that do not accurately depict the business itself.
What’s so bad about that?
Creating professional trust and courtesy is important to any transaction. If you’re selling your hard-earned business, you want to ensure you’re selling to someone that you believe in and that will take care of what you’ve built. But the kind of trust in proprietary deals is nefarious – acquirers take advantage of a business owner’s naivety to nab the business out from under them.
Additionally, acquirers play on business owners’ emotions during prop deal negotiations. The longer you work with an individual, the more likely you are to sell to them. They may begin talking about the problems they see with your business and how they’re willing to overlook them if you sell to them.
How can I avoid proprietary deals?
In business, always be skeptical. It could be that a friend wants to purchase your business from you. Or perhaps someone that you know has been in the business for a long time and are familiar with. Great – but be skeptical. Enter into any negotiation about your business like you don’t know the people sitting across the table. Also, and perhaps most importantly, get someone on your side. Whether it’s RESCON or simply a friend, have someone else join you in any meetings with potential buyers as a neutral third party.
Dan Martell is the founder of Clarity.fm, a website that links people on entrepreneurship, marketing and startups with experts that can help them grow. When Martell decided to sell Clarity, he knew that the likely buyer was one of five New York City-based companies. Instead of calling each one and negotiating with all of them independently, he called a meeting and had all of them come to the same location. Without saying so, he was able to convey that there would be no proprietary deal and they would have to compete for the business.