Why are buyouts a good thing for new businesses?
In: Economics
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.
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