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Sand bagsThe term sandbagging refers to an intentional lowering of expectations.

Sandbagging can apply to anything from sports to business, and is the practice of intentionally deceiving others in an effort to lower the opponent’s or other party’s expectations.

In this post we will examine how sandbagging applies to businesses.

Sandbagging in a Startup

Sandbagging in business is the practice of initially under-promising and, after gaining an advantage, over-delivering.

In the case of starting a business, the business owners may hide or limit the expectations of the company’s actual potential growth and earnings capability to produce better-than-anticipated results for investors. The company manages the shareholder’s expectations by forecasting results that are less than what the business owners may actually expect.

Once the better-than-anticipated results are achieved, the company and its management looks better than expected to its shareholders.  This tactic may be used to gain an advantage in future negotiations.

Practice Tip:

Keep in mind that this practice is difficult, if not impossible, to maintain. Once the company realizes its full capability, it is difficult to continue to maintain low expectations over time.

As investors, analysts, and shareholders notice that a company far outperforms its expected earnings period after period, the market will adjust its expectations automatically regardless of what the company says its predicted earnings will be.

Sandbagging in the Sale of a Company

Sandbagging can also occur during the negotiations of an Asset Purchase or Stock Purchase Agreement whereby the buyer is fully aware of inaccuracies and/or omissions in the seller’s representations and warranties, and moves forward with the purchase anyway.

The buyer sandbags the seller by using these inaccuracies and/or omissions as the basis for an indemnity claim against the seller post-closing.  Sandbagging in the context of a business acquisition is the buyer’s intentional oversight regarding one or more misrepresentations or omissions in the purchase agreement.  

Practice Tip:

Knowing who your buyer is and whether they have a good reputation in their previous acquisitions is prudent.  Ask to speak to the former business owners who have sold their businesses to your prospective buyer before you sign a Letter of Intent.  

If after speaking to the former owners, you feel comfortable proceeding to the next stage in the selling process, then be diligent as you negotiate the purchase agreement.  

Seek the assistance of your legal and tax professionals in order to make full and accurate representations to your prospective buyer.  

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