One of the biggest mistakes owners make in selling their business is being lured into a private or one-sided deal.
What is a Private Deal?
Acquirers land a private deal when they convince owners to sell their businesses without creating a competitive marketplace. From an owner’s perspective, they are often flattered and drawn by the prospect of an easier exit. The reality can be different and at great cost.
Acquirers running a private 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 owners become the target of a private deal without even knowing they have been duped. First, someone from the acquiring business approaches the owner, complimenting them on their business. Meetings are held 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 private deal get to know one another, owners often share information with the acquirer that puts them in a compromised negotiation position. The interactions are set up as friendly exchanges between two well-intentioned parties, but many owners 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. This may seem like the perfect opportunity however with no distance between themselves and the acquirer, the ability to negotiate effectively is compromised. With only one acquirer there is no competitive tension to keep the buyers ‘honest’ with their offers and ensure the deal moves towards completion.
How to Avoid Getting Taken in By A Proprietary Deal
Savvy sellers avoid the proprietary deal by creating a competitive process for their business.
Putting your business on the market, available to all buyers, is the best scenario. This will test the true intentions of the party that made the initial approach. They may walk away and if that happens then it is fair to question if their intentions were genuine or if they were just fishing for information about your business.
If you still intend to pursue negotiations with a single party then at a minimum engage a third party, like a business broker, to facilitate the negotiation for you. This evens the playing field by involving an independent party who is working on your behalf to achieve the best available deal. Keeping you one step removed also means you will more objectively assess any forthcoming offer as you have not been party to the inevitable emotions driven by the negotiation process.
Unsolicited offers to buy businesses happen more regularly than you think and should not be dismissed without consideration, however, it is essential to protect your interests and take steps to ensure you get the best deal possible. To learn more about building a more valuable business, preparing for sale and the sale process please give me a call, I’d love to help.