Fiction: Good Companies Are Bought Not Sold
- Why many entrepreneurs believe good companies are bought, not sold
- Why this approach for making an exit results in suboptimal outcomes for founders
A common narrative among entrepreneurs is that good companies are bought, not sold. While this narrative seems like a straightforward exit strategy, 99% of the time this narrative proves false, leaving founders with a faulty or sub-optimized exit.
Why This Narrative Is Dangerous
The "good companies are bought not sold" narrative is one of the biggest pitfalls founders fall into when planning to make an exit.
This narrative finds its root in heavily publicized transactions like Facebook’s purchase of Instagram when Instagram wasn’t looking to sell. Entrepreneurs (successful or otherwise) perpetuate the narrative as they tell themselves that their product is so aligned with a buyer’s product, the buyer couldn’t help but notice and buy the founder’s company.
In effect, founders are telling themselves that:
- If I can build an aligned product, and
- If I can catch the attention of my target buyer, and
- If that buyer decides they’re going to make an offer, and
- If I’m happy with that offer,
- Then I’ll be able to make a great exit
That’s a lot of "ifs" that all need to line up for a successful exit to work out.
Even for founders who recognize that outcomes like Instagram’s are exceptional, inbound interest from private equity firms and M&A professionals can lead these same founders to feel their business’ best exit strategy is to wait until a buyer swoops in with a favorable offer.
If you as a founder think that waiting for the narrative to play out perfectly is the right exit strategy, then consider that:
- High-quality buyers who pay premiums without competition rarely swoop in out of nowhere
- A reactive approach is not ideal when selling your business, given that the timing of the offer (if an offer occurs at all) might not align with the founder’s interests
- A non-competitive sales situation limits your leverage and increases closing/retrade risk as a founder
The Rarity of the Swooping Buyer
As mentioned, some deals do play out according to the narrative, where a buyer is so interested in a company that they march in ready to pay a premium. These deals garner a lot of media attention and social discussion due to their extraordinary nature, and as humans we consider the most emphasized information to also be the most common.
But a deal where the buyer swoops in with a desirable offer probably happens 1 out of 100 times. They’re just not that common.
In reality, when founders wait around for buyers to make the first move, buyers drag their feet and look for problems with the business in order to justify low valuations and buyer-friendly purchase terms. So what many founders consider a good exit strategy—waiting for the premium buyer to show up—tends to yield an undesirable outcome.
A Reactive Approach Yields Suboptimal Outcomes
Being reactive instead of proactive is hardly ever the right strategy in any aspect of life, so why would you take a reactive approach when selling your business—your most valuable asset?
A key part of yielding a successful outcome in the sale of your business is to create urgency, as urgency induces buyers to move quickly and pay premiums. If you let the buyer drive the timeline, the deal will have no sense of urgency and buyers will drag out the sales process, watching to see if your company meets expectations and forecasts.
That’s assuming buyers reach out at all. If you don’t proactively initiate a sales process and invite buyers to participate, odds are they won’t know you exist.
Even if they do know you exist, big strategic buyers and private equity firms have dozens of other opportunities they’re likely considering at the same time. As a result, if your company isn’t posted for sale, then your target buyer may not consider the opportunity to buy at all.
To make a comparison, assume you’re a real estate investor and you have the choice among:
- 6 properties posted for sale that all meet your investment criteria
- 1 property that meets your criteria, but you’re not sure who the owner is or if the property is for sale
For the sake of efficiency, which property do you choose? One whose ownership information is easily accessible and you know is available.
How Private Equity Firms Optimize Outcomes Through a Proactive Process
Take a look at how private equity firms approach the sales process of their portfolio companies. Regardless of how you feel about private equity, you can be certain that PE firms are dead set on optimizing the exit value of their companies. So what do they do? They certainly don’t wait around for a buyer—they hire investment bankers and actively take their business to market, because they know proactively going to market is almost always going to yield the best outcome.
Inbound interest from buyers can make you feel like your company is a company to be bought, not sold, but if you want to optimize your outcome, you want to go to market on your timeline and on your terms like private equity firms do.
At Vista Point, roughly half of our deals are kicked off by some level of inbound interest (whether a written LOI or conversations indicating someone is forthcoming). The right thing to do in this situation is to hire an investment banker and make the process competitive to get the best outcome.
No Competition Means No Leverage
In the event that a buyer does reach out and make an offer, what kind of leverage will you have to improve the valuation and/or terms of the offer?
In a transaction process that only has one potential buyer, the only leverage you have is the ability to say "No." But saying “no” can only get you so far. The greatest leverage comes when you have multiple interested buyers negotiating against each other. Running a transaction with the full universe of buyers and transaction types will give you the most leverage to negotiate valuations up and undesirable terms out.
Consider Negotiations from the Buyer’s Standpoint
As a founder, you have a vision of the value your business could bring to an acquiring company, and you’ll likely use that vision to justify your price point.
But flip the script for a second and consider the conversations your potential acquirer’s executive team is having behind closed doors about whether or not they should buy your company. If you were acquiring a company, which argument would be more compelling?
- Non-competitive argument: "They want $100M because of what they bring to the table" or “They want a 3x multiple because that’s what their competitor got.”
- Competitive argument: "They have 4 bids at $100M. At least one of those bids is likely from a competitor. They want to work with us but aren’t going to take a discount, so if we can meet the market price then the deal is ours."
When you change buyers’ purchasing paradigm to focus on beating the competition, then you improve your leverage to request higher valuations and better purchase terms.
Sell, Don’t Sit
If your goal as a founder is to:
- Receive a premium valuation on your equity
- Reduce closing risk to ensure a deal actually happens by having multiple options
- Negotiate a founder-friendly purchase agreement
- Sell your business in a timely fashion
then you should throw out the narrative that good companies are bought, not sold.
Taking your business to market instead of waiting around doesn’t mean you have to remove your preferred buyer from consideration, nor does it mean that you’ll have to orchestrate a sales process all on your own. The best approach is to hire an investment bank to run a structured transaction. By hiring a qualified, unconflicted investment banker to sell your business, you will be better positioned to achieve a successful exit in a reasonable amount of time.