One of the biggest mistake owners make in selling their company is being lured into 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.
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.
Find out how you score on the eight factors that drive your company’s value by completing the Value Builder questionnaire:
If you display the bio of key staff members on your website, re-order the list so that it is alphabetical rather than hierarchical.
If your surname is in your company name, consider a re-brand. There’s nothing that makes a customer want to deal with the owner more than having the owner’s surname featured in the company name.
Giving someone the title of president conveys the message that they have real authority to solve customer problems.
Tim Ferriss, the author of The 4 Hour Work Week among other books, made the email auto-responder famous, and it can serve you well. Set up an automatic response to anyone sending you an email explaining that you are travelling or attending to a strategic project and unable to answer their questions immediately. Instead, train customers to direct questions to the person best suited to answer them quickly.
A word of caution using this strategy: if you continue to answer customer emails after setting up an auto-responder, it’s going to become transparent that you’re just trying to hide behind your autoresponder, which could diminish your credibility. If you set one up, you need to be ready to let others step in.
If you have the kind of business that customers visit in person, set up a home office so you can spend more time away from your location.
For a hard-charging A-type entrepreneur, the steps above can be complicated and feel counterintuitive. They may even have a short-term negative impact on your company’s sales, but once you get your customers trained to go to your team, you’ll be able to scale up further and ultimately maximize the value of your business.
Find out how you score on the eight factors that drive your company’s value by completing the Value Builder questionnaire:
Get Your Value Builder Score Now
