Proprietary vs. Non-Proprietary Deals
I believe we can all concur that the sale and acquisitions of a company is a most convoluted and inefficient set of processes. As economist – acquiring and selling business – we need to ask why? The differences are even more exasperated when addressing proprietary vs. non-proprietary.
A proprietary deal lets a specific buyer have a first chance to purchase a company before the company is presented to other buyers by the owner or an investment banker. Proprietary deals are often presented to specific buyers based on their perceived fit with the seller.
The processes is even more challenging for low / middle market entities. The inefficiencies I am referring to are:
- Matching the right buyers and sellers. The intercommunication is so limited between these parties. There does not exist a standard database of all the potential transactions. Although, this may be the next internet success story;
- Timing. The present process can be exhausting for all parties;
- Costs. This transaction involves an army of professionals. According to a Parthenon Group study, 55% of surveyed private equity funds plan to change their origination processes over the next 3 years. This is a higher percentage than fundraising, portfolio management, or any other fund process. For lower/middle market transactions this is so disproportionate to the sales price;
- Broker fees. When you involve a broker in the process, it's another party entering with the opportunity to collect a fee off the transaction. The average fee is around 1 to 2%, which many not seem like a lot in the beginning, but once you close, it turns out to be another piece of the pie given away;
- Preparation of documents. The entire history of the company must be laid out in a concise and accurate manner;
- Inability to deal directly working with the decision makers;
- Identification of the non-financial issues - employee retention, locations, etc.; and
- Most importantly, challenged companies do not "fit the ideal" profile of a "salable company".
There is no doubt that many transactions require a non-proprietary process to educate the seller. Despite the numerous analysis on the net price of a sale transaction – we are not aware of any empirical evidence that a proprietary transaction nets the seller more than a non-proprietary deal as it relates to low / middle market entities. This appears to be especially true for challenged entities. Equally important, for a proprietary transaction – the potential buyer needs to give a most realistic price and terms. This is to expedite the process, ensure the transaction does not turn into a non-proprietary process, and mitigates their costs.
Having a broker involved is not exclusive to having a “proprietary” transaction. Many times, the broker will know of a strategic player or of an entity where the acquisition can make quickly and at an equitable price.
Each process has its own characteristics, but one needs to appreciate that there are times for the proprietary transaction. On a historical average a low / middle market company seller has associate fees gross of 10% for the deal. (This includes all other transactions fees as well). For a low / middle market company, this can be money well spent, if your transaction is strategically unique or the seller does not have the professional support of attorneys, CPAs, etc.