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BUSINESS OWNERS, AS SELLERS, BE AWARE OF THE “PROPRIETARY DEAL”

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Attention Business Owners: Beware of the Proprietary Deals

When selling a business, owners need to exercise caution when considering a proprietary deal. This type of transaction grants a specific buyer the exclusive right to purchase the company before it is marketed to other potential buyers. While it may appear attractive at first glance, proprietary deals might not always maximize the sale price or overall value for sellers, especially those with high-quality lower middle-market businesses.

What Is a Proprietary Deal?

A proprietary deal is a sale process in which a single, pre-selected buyer is granted the opportunity to purchase a business before it is presented to a wider pool of potential buyers. These deals are often offered to buyers based on their alignment with the seller’s company, their industry expertise, or their relationship with the investment banker handling the sale.

Unlike auction-style sales, proprietary deals tend to offer a faster and simpler transaction process. While this appeals to both buyers and investment bankers—due to the quicker close—it can lead to a lower sale price for the seller.

The Hidden Downsides for Sellers

For many business owners, the appeal of a proprietary deal is the promise of a fast, straightforward transaction. However, sellers should carefully evaluate whether this approach aligns with their financial goals.

1. Lower Price: Without the competitive pressure of other buyers, the purchase price may be lower than what could be achieved through a broader auction. Other buyers might be willing to offer more, but they don’t have the chance to compete for your business.

2. Potential for a Suboptimal Deal Structure: Proprietary deals may not result in the best terms, particularly in cash consideration, deal structure, or transaction flexibility. Buyers, knowing that there is no competition, often leverage this advantage to negotiate less favorable terms for the seller.

3. Missed Opportunities: Often, proprietary deals are presented to buyers who already have established relationships with the investment banker. This limits the seller’s exposure to other potential buyers who could offer a higher purchase price or more favorable deal terms.

4. Confidential Information Exposure: During the proprietary deal process, sellers may inadvertently disclose sensitive company information to buyers, including competitors. If the deal falls through, this could result in a competitive disadvantage.

Why Do Buyers Seek Proprietary Deals?

Proprietary deals are highly sought after in the private equity and corporate development teams of strategic buyers because they eliminate competition. With no other buyers bidding, the price is often lower, and the deal can be completed more quickly with fewer complications.

By securing exclusive access to the seller’s company early in the process, buyers can negotiate more favorable terms and expedite the transaction. However, this rapid timeline, while beneficial to buyers, may limit the seller’s ability to shop the business to other potential buyers, ultimately compromising the sale price and exit value.

Why Competitive Bidding May Be the Better Option

For high-quality lower middle-market businesses, a competitive bidding process or controlled auction is often a better strategy. In this model, multiple buyers are invited to submit offers, driving up the price and improving the overall terms of the deal.

A broader market exposure reduces the likelihood of undervaluation and ensures that the sale process aligns with the seller’s goals. A controlled auction allows sellers to gauge interest from various types of buyers—such as private equity firms, strategic acquirers, and other investors—ensuring that the final buyer is the best fit both financially and strategically.

Key Benefits of Competitive Bidding

  • Maximized Sale Price: Competitive bidding can often result in a higher sale price due to multiple interested parties.
  • Better Deal Terms: With multiple bidders, the seller has greater leverage to negotiate favorable terms and avoid suboptimal deal structures.
  • Diversified Buyer Pool: A controlled auction attracts a diverse range of buyers, helping to find the best financial and strategic fit.
  • Reduced Risk: Broader market exposure minimizes the risk of undervaluation and ensures a fair process.

Conclusion: Weighing the Risks and Rewards

While proprietary deals may seem like a quick and easy path, they come with significant risks for sellers. The lack of competition could lead to a lower price and less favorable deal terms. In contrast, a competitive bidding process can help maximize value, attract a wider range of buyers, and ensure that the sale aligns with the seller’s objectives.

For Canadian business owners looking to sell, it’s crucial to consider all options, including the potential advantages of a controlled auction. Consulting with an experienced M&A advisor or investment banker can help you navigate the complexities of business sales and ensure the best outcome for your company’s future.