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:

  1. 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.
  2. 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.
  3. 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.



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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
  • Peter Edward Welch
    Posted at 16:34h, 22 June Reply

    So well summed-up: “perhaps not knowing the inherent value in the business or its assets, accepts the offer without ever really looking into alternatives.” I suspect that in reality that those who fall prey probably are concerned that another ‘better offer’ might not come along. Or that a single offer is simpler to digest versus ‘the ideal’ multiple-offers. The personality of the seller has I suspect a great deal to do with it. And, of course, your great advice, seek an M&A adviser before making a decision. Very interesting article though.

    • Nate Nead
      Posted at 17:59h, 22 June Reply

      Thanks Peter. The parallels to dating when doing deals seem to continue ad-infinitum. It’s often the mentality of “maybe this is as good as it gets.” I would counter with, “there are many fish in the sea.” Acting arrogant and pompous when an initial offer is presented is certainly not well-advised, but settling on the first offer is a recipe for leaving chips on the table.

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