[This is a story about Bob. Bob is not his real name, but he is a real person. The events here were gleaned from intermittent conversations and pieced together as accurately as I could.]

I’d never heard the term “lifestyle business” until I met Bob. It was a few years ago, not long after he started a software company with the goal of being bought out. I told him about my company, and that’s when he introduced me to the term and explained the difference between a startup and a lifestyle business.

When I first met him, Bob was struggling to get off-the-shelf versions of his products to sell, so his company kept afloat by consulting – mainly providing customized implementations of their core product.

Finally they hit pay dirt when a golden trifecta of companies each bought multiple team licenses for his product. I won’t name the golden trifecta, but the three companies make chips, make computers, and sell the software that runs the computers, respectively. This got the attention of some national players, and Bob’s dream of selling his software company for a big payoff began to take shape.

Several suitors made preliminary offers, but one stood out. We’ll called it BigInvestCo. It had a track record of success and made the best offer. So he said thanks but no thanks to the other outfits and settled on BigInvestCo.

Then things slowly went south. It seems that these masters of enterprise at BigInvestCo were con men in $2000 suits. They suggested that the buyout price would be in the “set for life” range. After Bob had said no thanks to the other suitors, BigInvestCo lowered the buyout figure by half – which still would have been very good money. Following that, they did the due diligence and the final offer was to be put together. And that’s where things went bad.

The initial offer (which I assume was non-binding) was back in June, and BigInvestCo told Bob they hoped to close the deal by the end of the month. As part of the deal, he and his team would be given positions in a newly formed company, which would be a subsidiary of the BigInvestCo’s existing business. But the existing channel partners would be replaced by their in-house sales channel, so there was no need to keep nurturing them. Those ties were severed.

The owner of a startup is the rainmaker. Bob had hired a few salespeople, but none of them had the passion and understanding of the products to close deals like Bob did. But with Bob spending weeks away from his business while trying to negotiate the deal, the sales pipeline started to dry up.

Every time the deal seemed to be on the verge of closing, BigInvestCo used all kinds of delaying tactics and legal maneuvers designed to eat up time and legal expenses for Bob. With the sales pipeline sufficiently dry, a payroll to meet, and Bob’s finances getting tight, BigInvestCo came back with an offer at 10% of the June offer (i.e., 5% of the “set for life” figure).

I have to assume that hope overtook logic, because Bob plowed on, convinced he could still pull off a great deal for his company. Then one night, Bob’s out for dinner and drinks with BigInvestCo’s lawyer. After one too many, the lawyer let it slip that this is how these deals are done. They get the prospect all charged up, then as the deal progresses BigInvestCo does everything possible to bleed them out. When the seller is at the point of desperation, they make a lowball offer.

That was four months ago. I just found out the deal has gone tits up. I could tell it was painful, so I didn’t press for details. I don’t even know whether his company is still afloat.

At this point I suppose I could draw some conclusions or point out Bob’s missteps along the way. I assume readers can do that themselves. But I do think that starting a company solely to sell out is a long shot. You’re going up against people that do this for a living. They have deeper pockets, longer time lines, and less risk than you do. This is their game. They’re better at it than you.

Meanwhile, my quaint little lifestyle business looks better every month.

3 thoughts on “Lifestyle Business vs Software Startup: How One Company Got Screwed

  1. Just when you think your opinion of investors can’t get any lower…

    That is a really ugly and depressing story. It makes me glad I am not aiming to be bought out.

    Reply
  2. There is a reason that the folks who show up during M&A talks are referred to as stormtroopers. It’s a pity your friend hadn’t thought about that. Even Little Red Riding hood was cautious enough to notice the Wolf’s teeth. Your friend should have done his own due diligence on his suitors.

    Build to flip is illogical. If you don’t have enough faith in your own business to believe it is sustainable, then why would anyone with any sense buy it? That means your potential buyers are either honest fools or dishonest and know the true value of the business.

    Reply
  3. ‘Bob’ had worked for a company that was bought out for $1B. He wasn’t one of the principles, but he was involved in the process. He should have had some idea as to what to expect.

    That was back in the heady days of the web 1.0 bubble, though. It’s just my speculation, but I wonder whether buyers were less diligent in those days, warping his expectations – both on the build to flip business model and the acquisition process.

    Reply

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