Avoid This Mistake When Selling Your Business
One of the biggest mistakes owners need to avoid when selling their company is being lured into a proprietary deal.
The Definition Of A Proprietary Deal
Acquirers land a proprietary 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. The more resources business owners invest in the process and the more time they spend thinking—perhaps dreaming—of what it would mean to sell their business, the more emotionally committed they become to selling.
How To Avoid Getting Taken In By A Proprietary Deal
Savvy sellers avoid the proprietary deal by creating a competitive process for their company. Your business may have several natural acquirers that would be interested in negotiating a purchase. Knowing who your natural acquirers are gives you a head start on designing your business to be more attractive to them, putting you in the catbird’s seat when you’re ready to sell.
Knowing the market value of your business ensures you have the information to understand if an offer is worth exploring. If you are considering selling in the next five years, you should have a professional provide you with an Opinion of Value.
Professionally packaging your business information and marketing to a broader pool of qualified buyers will give you a better chance of receiving competing offers. While 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.