Proprietary Deals: How to Avoid Getting Screwed in M&A
Not all business buyers are the supposed “sharks” represented in pop culture, but there are no shortage of them in the financial sector. They’re the ones who begin circling round the moment there is any hint of blood in the water. Ultimately, they’re looking for a distressed situation where value still exists in brand, assets or processes. Perhaps the individual assets are worth more chopped-up than together or maybe they know a strategic buyer willing to pay a significant premium above market and they can thus make a “quick flip” of the company.
Definition of a Proprietary Deal
The term is somewhat self-evident, but often not recognized by those outside financial circles. The typical proprietary deal in laymen’s terms involves an acquisition without a strategic auction. It means a single acquirer approaches a potential seller with an offer to buy and the seller, perhaps not knowing the inherent value in the business or its assets, accepts the offer without ever really looking into alternatives.
The Downsides
Not all such situations include distress or massive undervaluation, but there are certainly risks inherent in doing a deal with a private equity investor, family office or local buyer:
- Money could be left on the table. Traditional business valuations in this type of scenario often don’t reflect the true value a strategic acquirer could pay for the business. Even if the proprietary offer comes in reasonable, it may not reflect what someone else would be willing to pay if they were pushed to the limit and were competing for the business.
- Other deal terms–apart from value–may not be as favorable as they could have otherwise been. Things like earn-outs, employment contracts and cash vs. stock terms will most likely be weighted more in the buyer’s favor.
- Negotiation power is forfeited to the buyer. Devoid of other suitors, the buyer is given more negotiation power and the buyer is often left thinking, “I may not get another deal this good…ever.” A buyer may feel pressure to sell because the deal is “good enough.”
Financial buyers love proprietary deals. They love making the buyer feel as though they’re the only game in town, that they’re coming in with a great offer and that the seller shouldn’t even talk to other buyers. This is the best place for a buyer to sit. Buyers hate going into business auctions, they hate competing for an opportunity and no one likes to lose a deal they were so excited about acquiring.
If you’re like most buyers in the mid to lower mid-market, you may actually have an assumption that your business is worth much, much more than what any reasonable buyer would offer. This may help you have the gumption to turn down the proprietary deal, but unfortunately, your unrealistic business valuation expectation may not bode well for later negotiations with other acquirers.
Not All Bad
In referencing proprietary deals it’s important to keep in mind that not all are entirely bad. No deal is perfect. In some cases, I’m still amazed that deals are completed at all, let alone done so with some favorable terms that well outstripped my own expectations of any deal. It goes to show that some businesses represent a major advantage to the buyer.
When your deal becomes a proprietary deal–and it comes at just the right moment–it’s still helpful to get with an M&A advisor to ensure you’re not leaving money or other deal terms on the table by ignoring other potentially more strategic acquirers. Being a proprietary opportunity initially is actually not a bad thing because it provides an initial starting point for other Indications of Interest or Letters of Intent for acquisition that might come shortly thereafter from other potential bidders.
One thing is for certain, the best way to avoid getting screwed in the most important transaction of your life is to ensure not to accept the first offer that comes across the table. Multiple buyers is always a scenario that benefits the seller and the seller needs all the help he can get. The best way to avoid the sharks is to play them at their own game.
- Covid-19 Impact on US Private Capital Raising Activity in 2020 - May 27, 2021
- Healthcare 2021: Trends, M&A & Valuations - May 19, 2021
- 2021 Outlook on Media & Telecom M&A Transactions - May 12, 2021
