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.

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