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Legit reason to start a business?

JOS Readers,

Theoretical scenario here.

I want to start my own company.  Could be software, could be non-tech related.

Would it be foolish to design, start and grow the business for the sole goal of it being bought by a competitor or other interested party?

Foolish?  Sounds about as foolish as starting a company for the obvious goal: success and money.

Your thoughts?  Know anyone who has succeeded taking this tact?

TheWonderer
Tuesday, August 10, 2004

It's not foolish, but may be more difficult.  When your company is going through tough times and you are under pressure, will the motivation of ultimately selling your company be enough to stop you from throwing the towel in?

Chris Peacock
Tuesday, August 10, 2004

"Would it be foolish to design, start and grow the business for the sole goal of it being bought by a competitor or other interested party?"

Were you asleep during the dot-com boom ? Loads of start-ups were created with just this intent. Most went bust, but many were indeed bought out for lots of money.

Nemesis
Tuesday, August 10, 2004

Isn't this the modus operandi of most startups?

i.e. The business plan incorporates an exit strategy. Acquisition is a valid exit strategy.

David Jones
Tuesday, August 10, 2004

at times i have thought this myself.

what formed a company for the sole purpose of writing a product and selling it? i would keep my day job. get 1 partner for business analyst/qa testing. and then look to hire college interns. maybe, hire 1 full-time programmer.

my thought was to get a good basic solid product and then sell it. not have the hassles of a company getting big. heck, maybe i wouldn't even have any customers. am i crazy?

Patrick
Tuesday, August 10, 2004

>> Were you asleep during the dot-com boom ? Loads of start-ups were created with just this intent.

Intent is one thing, but *truly* executing with that goal in mind is another.  I worked at 2 such startups where this was the stated intent, but that's not how the companies were operated.  I had friends at other startups in the Valley that began with this intent as well, but that's not where they ended up either.

TheWonderer
Tuesday, August 10, 2004

i would think of it as counter-motivational.  while i grant that money is a great motivator, its still nice to go to work thinking that there's more to it than that...

Kenny
Tuesday, August 10, 2004


>Isn't this the modus operandi of most startups?

This is what's wrong with a lot of "startups".

Look, when someone starts a deli do they have an "exit strategy."

Does General Motors have an "exit strategy."

No, only venture capitalists and grifter "entrepreneurs" have "exit strategies."

...
Tuesday, August 10, 2004

Well, I tried that. It's become obvious that nobody is going to pay much for a company that has only potential and no customers or revenue, let alone profit. So, it looks like I'm going to have to take my product to market on my own and that was the part I was hoping to avoid. My current thinking is that if I actually start showing a profit, I won't be willing to sell for anything less than instant retirement.

I'm think that allowing for the possibility of buyout in your exit strategy is valid, but I think the focus has to be 'profit or get out' not 'no profit and buyout'. And really, I should have been able to figure that out right at the start.

Ron Porter
Tuesday, August 10, 2004

>when someone starts a deli do they have an "exit strategy."
I knew a guy who made a living starting deli/restaurants, establishing them, and then selling them to other people.  The failure rate in restaurants is around 95%. But that was his gig.

Peter
Tuesday, August 10, 2004

Wonderer,

A good book on the subject is "The Monk and the Riddle" by Randy Komisar.  It's an easy read.

Ewan's Dad
Tuesday, August 10, 2004

As many have said, you will almost certainly have to show revenue, or have contracts that will generate revenue.... and not just any revenue, enough to make it worth "someone's" time to come in and value your interest, perform due diligence, etc.  It is not inexpensive to acquire a company, so it'd have to be a pretty spectacular product / IP in order to draw a buyer without customers.

<sigh/>
Tuesday, August 10, 2004


In Barry Moltz's book "You Have to Be a Little Crazy", he says that it can be disastrous to start a business with that mindset.

His reasoning is that it won't be enough to carry you through the ups and down of business. He goes on to say that as soon as things look pretty bad, people that are only trying to cash in will give up because they think their opportunity to sell is gone.

While I can appreciate Barry's viewpoint and recognize that there is some truth to it, I think that most people with the moxy to start and run a successful business probably have enough fortitude to keep their eye on the ball and not let the day-day fluctuations get them down.

Mark Hoffman
Tuesday, August 10, 2004

You have to ask yourself why somebody would want to buy your business.  The chief motivators are going to be that your organization has something that they can't get anywhere else.  So your product, service or market awareness needs to be superior to what anybody else can offer, or what the buyer can hope to achieve on their own.  That's because it's much more expensive to acquire a company than it is to start your own from the ground up.  In addition to covering your business-starting expenses, they also have to cover their own costs of acquisition. That includes arranging financing, extensive auditing to make sure what you're selling is what he's buying, and whatever markup you've put into your selling price.

So first you've got to bust your hump to make your business a wild success.  Then, for some reason that isn't clear, you want to sell it off?  I can't think of many good reasons to sell off a successful business, other than leaving the area/industry or retiring.

Clay Dowling
Tuesday, August 10, 2004

It's stupid for all the reasons mentioned above - you have to have a successful business for anyone to want to buy it, and the hope of someone maybe buying it some day down the line isn't likely to be enough motivation to keep it going.

The pipe dream of developing a product, or half developing it so that someone like Microsoft will gobble you up is probbaly just that - a dream.

I think the deli thing is different, the guy's practically running a franchise service.

www.MarkTAW.com
Tuesday, August 10, 2004

when I was last in business, albeit working for the parents, it was solely for the following reasons.

Money
Fun
Money

If any of the above had stopped being there, I would have walked.

Tapiwa
Tuesday, August 10, 2004

It's absolutely a legitimate goal to have the business bought out.  But you still need to have a sound, viable business plan (and execute it) to get to the point where you will be attractive to a potential buyer.

I would seek the advice of someone who knows how to set up and run a business with this objective.

AMS
Tuesday, August 10, 2004

That goal is too far off to aim for. Just focus on growing a great busines from scratch. When you get to the point where it has enough value to get a decent price, you may feel differently about selling it, or you may not. Decide then.

If you go in with the attitude of "I'm just going to sell it" then it is easy to say about a lot of things- "We don't have to make this really work well, since we're just going to sell it anyway." In the meantime, everything falls apart long before you can sell, because everything was built half- assed since you weren't planning to be there long anyway.

Doing it Well
Tuesday, August 10, 2004


> I knew a guy who made a living starting deli/restaurants

This wasn't the guy who had a deli right off of Montague Expressway in Santa Clara. Right close to Montague and Mission College Parkway.

He knew what he was doing. I went their for about 3 years when I worked close by and he still had the same sandwich makers working there the whole time.

Compare to Togo's or Subway.

silicon valley fella
Tuesday, August 10, 2004

I'll echo a few points here, but sumarized, and add a few others:
1) Most folks starting something should have an exit plan.  A guy running a deli does -- he'll close it when he runs out of money.  It's often a sanity-saver to set that point ahead of time instead of closing down once you are burried in personal debt and have your now former employees on the street because you were stringing them along too long.
2) It's usually the case that an entrepeneur makes a poor CEO for a large company.  It is sometimes the case that an entrepeneur makes a poor CEO of an established company.  It's most likely the case that you will be either bought up, kicked out by the shareholders, or pass things off to a chosen successor.  This is perfectly normal and should probably be something that you decide for yourself.
3) There's nothing wrong with getting bought up.  There's nothing wrong with having that be an exit plan.  However, it's important that a business plan be realistic and include a plan B if your goal is to be bought up as well as a realistic assessment of the likelyhood of being bought up.
4) Another company is only going to pay you an amount of money equal to their estimate of how much it will cost for them to quash you through other means. 
5) Another company is not necessarily going to pay you if they figure they can pick up your assets cheap when you go bankrupt.  Even if they've invested in you already.
6) If you negotiate and get far enough that you are talking about prices, they will probably know how much money you have and how profitable you are.  This figures in the calculations for #4 and #5.
7) A product that never makes it to market and/or is ineffective in the market is not necessarily a threat to the existing players.

Flamebait Sr.
Tuesday, August 10, 2004

Before you start, identify a market and build a product for that market rather than build a product followed by a frantic search for a market to use that product in.

Countless dot-coms did the latter and look where they ended up...

TheGeezer
Tuesday, August 10, 2004

Who would buy a company who's only purpose is being bought?

The company must be able to stand on it's own, profitably, to be of interest to anyone.

You don't start a business JUST to make money. If that's the only thing you'll get out of it, then you won't be able to survive the lows. (See excellent comments above).

Just like any other job: if you're only there for the money.... you won't be there long.

Mr.Analogy (ISV owner)
Tuesday, August 10, 2004

And..

I, personally, can think of very few reasons someone would sell a successful, growing business. (And who'd buy anything that wasn't those things?)

Only reason I can think of is that someone is retiring and needs a lot of cash to buy into a nursing home <g>.  But, honestly, it's probably easier to find and hire someone to run your business than to sell it.

If YOU can't find someone to run your business, how would the new owner find anyone?

And if the NEW owner could afford to hire someone and pay off the cost of buying the business then YOU could too.




And

Mr.Analogy (ISV owner)
Tuesday, August 10, 2004

....Nothing.

(Ignore that trailing AND above)

Mr.Analogy (ISV owner)
Tuesday, August 10, 2004

Actually, I have a friend who just loves the process of building something out of nothing.  But he has no interest in the tedious task of just maintaining a business.  He could do it, and he does, but he doesn't have much fun doing it.  He gets so energized about building a new idea that he can't fall asleep sometimes.  His idea for the future is to take his good ideas (and they are very good ideas), partner with people who have the skills to implement the ideas, build the idea into a finished and viable business, and  hopefully sell it to a larger company that has an interest.  Then taking the revenue from the sale and repeating the process again with another idea.

There is still a lot of pride and legitimacy involved in it, but then we are talking about software and services, not businesses where we would be selling jobs out along with the product.  If you have a bunch of employees that are attached to the business, and then you sell it, things get a lot more gray.

Clay Whipkey
Tuesday, August 10, 2004

How about entering a very small market and getting bought by a competitor, just to go away?

Fred
Tuesday, August 10, 2004

There's nothing wrong with building a company with the intention of being bought out. After all, if someone is interested, you are probably building something of value.

a
Wednesday, August 11, 2004

I would not only say that it is NOT dumb to start out your business with the idea of selling it, it is in fact very smart.  Not smart for the reason that you want to sell it, but smart that you are already thinking about your exit strategy. 

Smart, experienced investors are always planning their exit strategies BEFORE they make an investment.  Why?  Because exiting an investment is something that you may very likely have to do in a rush or in less than ideal circumstances.  You want to plan for those circumstances and not get blind-sided by them (which more often than not is going to mean taking a big loss.)    By starting a business, you are making an investment - an investment of your resources e.g. time + money and potentially of other people's resources.  If you ask other people to invest in your business, they will want to know what your exit strategy is because they will want to know how they can get access to their capital when they want it.

To respond to some points that were made above.  People starting GM or another large company more than likely had an exit strategy.  A reasonable exit strategy is to go public - at that point, your stake in the business is liquid and can be converted to cash pretty easily and quickly.  A guy starting a deli would hopefully  have an exit strategy too.  It might be to sell off the business, to pass it on to his children, to grow into a large chain and go public, to merge with somebody else, etc.

Why would someone want to sell a successful growing business?  There are plenty of reasons.  Examples include:
- Major lifechanging situation that requires lots of cash e.g. serious illness, divorce, etc.
- Not wanting to deal with the headache of running a business.
- Getting a good offer on the business such that you think you could take the capital and do better with it elsewhere.
- Your financial needs aren't met by the business.  A successful, growing business is not necessarily equal to a  business that provides you with lots of cash flow or ready access to cash.  You might well be in a situation where that is more desirable to having lots of paper wealth.
- Etc.

JJS
Wednesday, August 11, 2004

silicon valley fella, he used to live in NY, then he wanted to retire, so he moved to FL, got bored and started back up again. I forget his name, but he almost always named his shops something like "sandwich chef." Usually set up in a business park, or near a bunch of offices buildings.

Peter
Wednesday, August 11, 2004

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