The Biggest Mistake
Owners Make When Selling
One of
the biggest mistake owners make in selling their company is being lured into a
proprietary deal.
The
Definition Of A Proprietary Deal
Acquirers land a
proprietary deal (or “prop deal”) when they convince owners to sell their
businesses without creating a competitive marketplace. Acquirers running a
proprietary deal know they don’t have any competition and tend to make weaker
offers with more punitive terms because they know nobody else is bidding.
Many founders become the
target of a proprietary deal without even knowing they have been duped. First,
someone senior from the acquiring company approaches the founder, complimenting
them on their business. The acquirer suggests lunch, and then high-level financials
are exchanged. Soon, the owner starts going down a path that is difficult to
come back from.
As the parties in a
proprietary deal get to know one another, founders often share information with
the acquirer that puts them in a compromised negotiation position. The
interactions are set up as friendly exchanges between two industry leaders, but
many founders reveal key facts in these discussions that end up being used
against them when negotiations turn serious. Business owners also become more
emotionally committed to selling the more resources they invest in the process
and the more time they spend thinking—perhaps dreaming—of what it would mean to
sell their business.
How
To Avoid Getting Taken In By A Proprietary Deal
Savvy sellers avoid the
proprietary deal by creating a competitive process for their company. Take for
example Dan Martell, the founder of Clarity.fm, among other companies. When Martell decided to sell Clarity,
he knew the likely buyer was one of five New York-based companies. Instead of
negotiating with one, he invited all five to an event he hosted in New York.
The five CEOs—all of whom knew one another—saw a room full of their competitors
and realized that if Clarity went on the market, they would have to out-bid the
other buyers in that room.
Hosting the event was
Martell’s way of communicating to all the potential buyers that a proprietary
deal was off the table and that if they wanted to buy Clarity, they would have
to compete for it.
It’s flattering to
receive a call from an executive at a company you respect. Just know that if
you accept their invitation of lunch, you run the risk of becoming the latest
casualty of the proprietary deal.
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
