The Danger of Being Lured into a Proprietary Deal

If you were looking to buy a house, you wouldn’t want to compete with other bidders. Acquirers are no different. 

They want to avoid competing with anyone to buy your business. Acquirers land a proprietary deal (or “prop deal”) by convincing you to sell your business without creating a marketplace for your company. 

What Business Owners Are Vulnerable

As the owner of a smaller business, you are particularly vulnerable to becoming victim to a prop deal. 

Why? 

Sophisticated buyers know it is likely your first time selling a company. Not only are you a newbie to the M&A process but you’re also unlikely to have a corporate finance department staffed with M&A experts, meaning you’re alone and vulnerable to the advances of a sophisticated buyer. 

You can’t blame acquirers for attempting to get a deal. Acquirers are simply trying to get the highest return for their shareholders when they buy a company. 

I was reminded of this during a recent Built to Sell Radio episode featuring Nathan Winch, the founder of the U.K. micro-private equity firm Winch & Co.

As Winch expressed to host John Warrillow, they look for prop deals because they are more likely to meet his four criteria for a good deal: 

  1. Affordability. Because Winch is a smaller PE firm, he must do deals that aren’t too expensive.
  2. Familiarity. Winch prefers to buy businesses in industries he knows well. 
  3. Felicitousness. Buying companies that integrate well with another business they own is attractive to Winch and his team.
  4. Return. Winch aims to invest in companies that allow him to resell for a high multiple.

How to Defend Yourself Against the Prop Deal Trap

Most acquirers desire similar qualities in a company they are looking to buy. They want a systemized business that’s not dependent on the owner (download our guide for creating standard operating procedures), steady cash flow, a protected niche, and good managers willing to stay after the acquisition. If your company ticks its box, it will likely be attractive to several acquirers. When you get approached by an acquirer, please take it as a sign to create a marketplace for your company by reaching out to other potential buyers. 

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