What Deals Drought? Founders Without Backing Are Still Selling Their Businesses
THE TAKEAWAY
The drought in dealmaking isn’t hurting the sales of founder-backed companies nearly as much as it has hit firms with PE or VC investors. Founders who own their companies are often less price sensitive or have other reasons for selling, according to people working on those types of deals.
Merger and acquisition activity has been anemic for more than a year, with buyers and sellers often far apart on price after valuations have taken a beating. But one corner of the M&A market has held up much better than others during the doldrums: the sale of companies owned by a founder with neither venture capital nor private equity backers.
The number of deals of that type declined just 5.7% in 2022 from a blockbuster 2021, compared with drops of 19% and 21% for sales of firms that had PE or VC backing, respectively, according to PitchBook data. In the first quarter of this year, 85% of all takeovers PitchBook tracked were of founder-owned companies with no outside backing, higher than for any full year on record.
Bankers and lawyers handling these types of deals who spoke with The Information said they are continuing to happen because many founders that haven’t raised money are less price sensitive at this moment, especially without pressure from outside investors to get every dollar possible for their company. Firms without PE or VC investors also likely don’t have a previous valuation level they feel like they need to measure up to in order to sell.
To a founder with an opportunity to sell for, say, a guaranteed $100 million today or a theoretical $130 million several years from now, $100 million is often still enough money to entice them to sell, said Matt Simpson, a co-chair of law firm Mintz’s private equity practice.
Because other factors, such as the urge to retire or spend more time with family, might be motivating these founders, many are heading for the exits—or even the beach. Simpson said he worked on a deal with a founder who wanted “palm-tree peace of mind.” That founder ultimately accepted less money in exchange for a guaranteed clean break from the company.
“Founders might want to sell because they’re tired or burnt out,” said Thomas Smale, CEO of technology-focused M&A advisory firm FE International, which recently advised a founder-owned company, Retriever, on its sale to private equity firm Lever Technology. “A PE firm is never going to sell because the general partner is tired.”
‘We Were Pretty Damn Tired’
After running every aspect of Retriever for two years, its co-founders, Annie Kramer and Alex Sydell, were indeed tired. But they were also in the unusual position of running a company that benefited from recent economic turmoil.
Retriever helps remote employees return laptops and other devices. As companies across the U.S. accepted the reality that remote work in some form was here to stay after Covid-19 lockdowns, Retriever’s business boomed, Sydell said. A wave of layoffs across corporate America last year added to that growth. And because it ran such a lean business, Retriever was profitable almost immediately, Kramer said.
As demand for their service surged last year, Kramer and Sydell felt they should take advantage of the opportunity to cash out while business was doing well and sell to a private equity firm with logistical and managerial expertise. Kramer and Sydell sold 100% of the company to Lever Technology and agreed to exit completely after a six-month transition period.
Kramer and Sydell were both happy to get money off the table while times were good, but they agreed there was also a “pretty major fatigue component.”
“Selfishly, we were also pretty damn tired from two years of hustling,” Sydell said.