I received a blog, today, from an advisor in the US (John Warrillow): it talks about what (in the US) is called the “Proprietary Deal” – When acquirers use the term “proprietary deal” they are referring to buying a business directly from the owner without the hassles of a “greedy” investment banker [read “or advisor”] driving up the price by soliciting – or threatening to solicit — competitive bids for your company. A proprietary deal is basically an exclusive business deal.

Falling victim to the proprietary deal is easy. You get approached by a partner in a PE firm or a senior person from a big company in your industry you know and respect. They shower you with compliments about your business, invite you to a fancy lunch and then ask if you’d consider selling. Once you agree to a conversation, they convince you there is no need to involve an advisor to represent you – why pay the money, they’ll say, to some guy or gal who has done nothing to help you build your business – we’re friends after all.

But becoming the mark in a proprietary deal is much more expensive than having your wallet pick pocketed by a street crook.

This is not to say, of course, that every big company or PE firm is going to try and “pick your pocket”, but it is my own experience that, for some organisations, it is simply the way they do business; and they are very skilled at it – especially given they do not have to buy YOUR business (they might really want to, but they DON’T HAVE TO).

John’s blog reminded me of a client I was advising about 12 years ago (prior to setting up a private equity fund, myself) – a significant private health group that were innovators in their field, who were approached by a major international company to buy them. There were lots of strategic reasons why an above standard valuation would apply. There were two advisors on the deal; the other being an accountant representing a number of the shareholders in my client entity. Both the accountant and the shareholders were convinced that the deal was virtually done, from the beginning – so convinced, in fact, they didn’t watch for the signs.

Many expensive dinners later, after tens of thousands of dollars in due diligence costs, and 8 months of distractions to shareholders and management, the deal fell over.

The dinners were interesting: lots of friendly banter over expensive bottles of wine; discussions as to the benefits of the deal to the “purchaser”; even discussions as to pricing – one thing was missing, however: every time pricing was mentioned, the purchaser’s management would look sagely, but never once did they affirm the price that was indicated. This mechanism was so well performed; it had to have been a practiced art.