The sale or acquisition of a company brings a convoluted and inefficient set of processes. As economists who acquire and sell businesses, Lakelet Capital is always asking the question, “Why?”
The complexities become even for difficult to navigate with regard to proprietary vs. non-proprietary entities. A proprietary deal allows a specific buyer the first opportunity 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 are especially challenging for low/middle market entities. The inefficiencies include:
- Fit—The intercommunication is so limited between these parties, making it difficult to find suitable partners;
- Timing—The present process can be extremely time-consuming and exhausting for all parties;
- Costs—This transaction involves an army of professionals. According to a Parthenon Group study, 55% of surveyed private equity funds planned to change their origination processes over the next three years. This is a higher percentage than fundraising, portfolio management, or any other fund process for that matter. For lower/middle-market transactions this is quite 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 1-2%, which may not seem like a lot in the beginning, but once you close, it turns out to be a considerable piece of the pie forfeited;
- Documentation—The entire history of the company must be laid out in a concise and accurate manner, which is another time-intensive process;
- Connection—You often do not have the ability to deal directly with the decision-makers;
- Ancillaries—You need to clearly identify all of the non-financial issues, such as employee retention, locations, etc.; and
- Attraction—Challenged companies do not often fit the ideal profile of a “salable company”.
Many transactions require a non-proprietary process to educate the seller. Despite the extensive 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 provide the most realistic price and terms. This expedites the process, ensures the transaction does not turn into a non-proprietary process and mitigates 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 be made 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.