One of the biggest mistakes owners make in selling their company is being lured into a proprietary deal.
These deals usually begin in a very benign way but slowly take on a life of their own, leaving a business owner feeling vulnerable and compromised. Ultimately, they feel trapped in making a deal that is not beneficial for them.
In this post, we’ll look at the techniques used to lure you into these deals as well as how to avoid them.
With Maximum Possibilities as your partner, the fear of entering a proprietary deal is eliminated.
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 which 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. This happens because they spend more time 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 proprietary deals 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 entered a room full of their competitors whom knew one another. They realized that if Clarity went on the market, they would have to out-bid the others.
Hosting the event was Martell’s way of communicating to all potential buyers that a proprietary deal was off the table. If anyone wanted to buy Clarity, they would have to compete for it.
What Time is it for Your Company?
It’s flattering to receive a call from an executive at a company you respect. Just know that if you accept their invitation to lunch, you run the risk of becoming the latest casualty of the proprietary deal.
Determining the best time to sell is one of the ways Maximum Possibilities helps you. Just as important, is knowing the best candidate to sell to.
Let Maximum Possibilities guide you through the often perilous path of selling your business to maximize your profits.
Contact us today and let’s discuss the best options for your business sale.