Why are buyouts a good thing for new businesses?

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Why are buyouts a good thing for new businesses?

In: Economics

Some of the time a new business will have something that sets it apart and puts it on the path for growth. It might have a new technique, special technology, a different strategy, or just a recognized name that gives it the potential to do a lot more business.

However new businesses tend to lack a lot of other stuff. Excess money for example, expertise in various areas like accounting, logistics, personnel, marketing, etc. Maybe they could acquire those things but it would be a difficult, time consuming, and risky process. Their potential for growth might be a limited window of opportunity and doing all that may even be too slow.

By being bought out a bigger company with all or most of those missing pieces can turn the small business into its greatest potential. The owners in turn get to cash in on their business immediately and perhaps even when it is the most valuable it could be under their guidance.

A buyout is a massive source of cash for a new business. If you’re looking to rapidly expand, or if you have debts to pay off, then a buyout is a great way of raising the funds to do so. On the other hand, it means that most of your profits are going somewhere else now.

First off, buyouts aren’t *inherently* good things for new businesses. They usually are, but not always.

Presumably, the new business has something unique or profitable. (Otherwise, no one would be looking to buy them out.) New businesses are usually lean and dynamic because they aren’t saddled with a lot of things that larger companies are–a perfect place for new ideas–but that also means they don’t have the experience or resources to capitalize on it.

A buyout combined the two–the buyer gets the new, fresh, profitable idea, and the buyee gets the resources to expand their idea. Of course, a buyout also means that the buyer gets all future profits, so to make up for it they buyee gets a boatload of cash (hence, buyout).

There’s a lot of factors at play, here, so there aren’t any hard and fast rules, but both sides have to weigh their future prospects. A new idea might make $10m over its lifetime without a buyout, but $100m with a buyout, so the small company and large company have to negotiate somewhere in between.

People start a business to make money. This often involves lots of time and borrowed money (or promising investors a portion of the company). When your new business gets bought out by Facebook for $100M, that means you finally got paid for all your hard work & the investors made a profit on their investments.