Why Do Companies Sell?
Fred has a good post today about Facebook and why they shouldn’t sell the company now, in which he makes the assertion that companies sell “because of fear, boredom, and personal financial issues.” He might not have meant this in such a black and white way, and while those might all be valid reasons why companies decide to sell, let me add a few others:
- Market timing: As they say, buy low – sell high. Sometimes, it’s just the right time to sell a business from the market’s perspective. Valuations have peaks and troughs, and sometimes the troughs can last for years. Whether you do an NPV/DCF model that says it’s the right time to sell, or you just rely on gut (“we aren’t going to see this price again for a long time…”), market timing is a critical factor
- Dilution: Sometimes, market conditions dictate that it isn’t the best time to sell, BUT company conditions dictate that continuing to be competitive, grow the top line, and generate long-term profits requires a significant amount of incremental capital or dilution that materially changes the expected value of the ultimate exit for existing shareholders (both investors and management)
- Fund life: Fortunately, we haven’t been up against this at Return Path, but sometimes the clock runs out on venture investors’ funds, and they are forced into a position of either needing to get liquidity for their LPs or distribute their portfolio company holdings. While neither is great for the portfolio, a sale may be preferable to a messy distribution
Fred’s reasons are all very founder-driven. And sometimes founders get to make the call on an exit. But factoring in a 360 view of the company’s stakeholders and external environments can often produce a different result in the conversation around when to exit.