Early on, amidst the euphoria of negotiations, I warned of the fact that the other side had never actually affirmed the price, and they actually never did. My client’s shareholders (and, sadly, even their accountant) were so intent the deal had been done, they ignored the signs, and would not entertain the possibility that their “mates” had not agreed. The deal fell over when a final offer was made by the purchaser: at a third of the expected price. Some upwards movement was offered, after this softening up process; but dependent upon highly onerous earn-out conditions that were not acceptable.
John goes on to describe 5 reasons to avoid being the target of a proprietary deal – most are reflected in the above example. John’s 5 examples are:
- You’ll get a lower price (and they will try their best to convince you that their offer is above fair and reasonable, because of …[pick any reason you like])
- Due diligence becomes protracted (it just goes on and on with more and more endless, unnecessary questions and challenging of financial or strategic conditions)
- Shrinkage (being worked over to diminish the deal value, at the last moment)
- Seller’s Remorse (realising afterwards that you should have done much better)
- Out of market terms (that reduce the value of the deal)
I haven’t seen the term proprietary deal used before, but: if it looks like a duck, quacks like a duck, and smells like a duck, it’s probably a duck – and John’s blog brought back a lot of duck memories, as it is not the only time I have seen this approach used.
Of course, it is not in every circumstance that a potential great deal works out this way; but you have to be ever so wary. On the other hand, if you really must sell, and sell in a hurry, then any deal could be better than no deal!
The following is a link to John’s article, if you would like to read more: http://www.builttosell.com/blog/2012/06/14/victimized-by-the-proprietary-deal/
By the way, John is also the author of a book Built to Sell: Creating a Business That Can Thrive Without You. I found it a really very entertaining read, with some interesting, practical, and challenging, real-life lessons; especially for service based businesses.
Thanks for reading, and, cheers for now
Principal Advisor, BF strategic