Planning For The Unexpected Return: Lessons From Grubhub’s Founder
Humble, Texas/USA 01/01/2020: Grubhub sign posted in the ground near some local businesses in Humble, TX. Grubhub is an online fast food delivery service that is becoming increasingly popular in the US- GETTY
Forbes- In the world of entrepreneurs and start-ups, the sale of a business is most often the goal of the founder and is the culmination of years of hard work and dedication. For many founders, it represents the end of a chapter and the beginning of new ventures. However, as demonstrated by the recent actions of Matt Maloney, founder of Grubhub, selling a company doesn't always mean closing the door for good. In some cases, owners find themselves wanting, or even needing, to regain control of the very businesses they once let go[1].
This scenario recently played out in dramatic fashion as Maloney made two separate offers exceeding $1 billion to buy back Grubhub from Just Eat Takeaway (JET). Despite the substantial bids, both offers were rejected, and JET ultimately sold Grubhub to another buyer for a fraction of what it originally paid and what Maloney had offered[2]. Maloney’s attempts to regain ownership illustrate a broader trend among entrepreneurs who, for various reasons, find themselves re-entering the ring after initially choosing to step away.
Why Do Founders Buy Back Their Businesses?
From a planning perspective, it's critical to understand why owners might want to reclaim their former enterprises. While it may seem counterintuitive to want to buy back a company that was sold for a significant profit, there are compelling reasons why this occurs:
Regaining Strategic Control: One of the most common motivations is the desire to steer the company back in line with the founder's original vision. For many, the realization that the new owners are taking the company in a direction contrary to their values or goals can be a bitter pill to swallow. Maloney’s case highlights this, as he expressed dissatisfaction with the new direction taken under JET’s ownership.
Financial Opportunities: A company's value can fluctuate dramatically based on management decisions, market conditions, or broader economic factors. In Maloney’s case, Grubhub's valuation had dropped significantly from its pandemic-era high. When founders perceive that they can buy back the business at a discount relative to its intrinsic potential, it becomes a tantalizing opportunity.
Personal and Emotional Factors: For many entrepreneurs, their businesses are more than just financial assets—they are deeply personal projects, almost akin to children. The emotional connection and sense of legacy can drive founders to reassume control, especially if they perceive that their company is at risk of losing its soul or brand integrity.
Lessons Learned and New Strategies: Some founders buy back their companies because they believe they can run them better with the benefit of hindsight. Lessons learned from their time away—whether by observing how the new owners managed the company or by gaining new insights from other ventures—can provide them with a fresh perspective on how to enhance the business’s performance.
Planning Considerations for Owners Thinking of Selling
What should advisors to business owners consider when planning for a sale, especially if their client might later want to reacquire their company? Even if your client insists they would never want to repurchase their business, the Grubhub saga underscores the importance of keeping future possibilities open. Here are a few strategic steps that advisors should consider:
Build in a Buyback Option: As part of the sale negotiations, include provisions that allow the original owner the right of first refusal if the new owner decides to sell or an option to purchase some or all of the company under certain conditions. This can streamline the process if the founder later decides to reacquire the business.
Ensure Favorable Exit Terms: Non-compete clauses, restrictions on equity stakes, and other contractual obligations can significantly complicate any future efforts to buy back a business. It's wise to review these terms carefully to avoid unnecessary barriers to reentry or at least make these restrictions go away if the client does make a bone fide offer.
Maintain Key Relationships: Even after selling, founders should be allowed to keep connections with key clients, employees, and stakeholders. These relationships can be crucial if a founder decides to repurchase and reintegrate into the business.
Stay Financially Prepared: The biggest challenge in buying back a business is often securing the necessary capital. Entrepreneurs who may consider a reacquisition down the road should remain financially flexible, whether by maintaining access to private equity, as Maloney did, or by having a strategic reserve of liquid assets. This means that the client may need help to resist the temptation to make investments in funds or partnerships which are illiquid with most of their capital.
Think Beyond the Immediate Sale: Advisors should develop plans for their clients to for various scenarios, including a possible buyback, even if it seems unlikely at the time of the initial sale. The market environment, personal circumstances, or even a change of heart can turn what once seemed like a permanent decision into a temporary one.
The Broader Implications for Estate and Succession Planning
For clients who are considering selling their businesses, the Grubhub case also highlights the need for robust and flexible estate and succession planning. Often, a sale is seen as the final chapter in an owner's involvement with a business. However, as we've seen, circumstances can change, and founders may find themselves back at the helm, or the deal falls through and the client needs alternatives, or the client starts a new business. This fluidity required to handle this scenario planning careful structuring of both the sale and the broader estate plan.
When working with clients on the sale of a business, planners should not only focus on tax implications but also on how to structure the deal to allow for flexibility in the future. Involving trust structures, buy-sell agreements, and family offices can provide clients with the tools to pivot should they decide to re-enter the business world.
What we learn from cases like Maloney’s is that a sale isn't always a final goodbye. For many founders, it's merely the beginning of a new chapter, with the possibility of revisiting the past. As advisors, it’s our role to ensure that clients are prepared for all contingencies—even the ones they may not foresee.
The story of Grubhub's founder trying to buy back his company is a vivid example of how deeply personal and strategic decisions in business ownership can be. Entrepreneurs often think of exits as permanent, but reality has a way of challenging such assumptions. By scenario planning and leaving room for the unexpected, advisors can help clients not only maximize their outcomes during a sale but also keep options open for the future.
See also:
Grubhub founder made $1bn proposals to buy company back from Just Eat Takeaway