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Caveat Venditor: Trust Asymmetries in Acquisitions of Entrepreneurial Firms

Melissa E. Graebner · 2009 · Academy of Management Journal, vol. 52, no. 3, pp. 435-472

Preparing to sellSourcing & targetsValuation & diligenceAny owner who intends to sell to someone they like
Why it is on the shelf. Almost every owner arrives at a sale carrying the same instinct: find a buyer you can trust, and the rest will follow. This study looked at both sides of real acquisitions of entrepreneurial firms and concluded the opposite, that selecting a buyer on the basis of trust increases rather than diminishes the seller’s vulnerability. That sentence is worth sitting with, because it contradicts the thing almost everyone believes.

The Institute's reading

Graebner takes a dyadic view, giving equal weight to buyer and seller, and finds their views of each other are systematically asymmetric. Each side forms beliefs about whether the counterpart is trustworthy and about whether the counterpart trusts them, and those beliefs are frequently wrong in both directions. Out of that asymmetry come two behaviors that feed each other: a tendency to behave deceptively, and a tendency to guard against deception.

The mechanism behind the central finding is uncomfortable and simple. Trust substitutes for protection. An owner who believes the buyer is honourable negotiates fewer safeguards, accepts vaguer commitments about employees and the future of the business, and does less verification. If the trust is well founded, nothing is lost. If it is not, the owner has removed exactly the protections that existed for this case. Trust is not the problem; using trust in place of terms is.

The Institute reads this as an argument for a specific discipline rather than for cynicism. You may like your buyer, and liking them is a legitimate input into who you sell to, particularly if you care what happens to your people. Just do not let it substitute for the written commitments, the diligence and the counsel you would have insisted on with a buyer you did not like. Put differently: choose warmly, and paper it coldly.

Key propositions

  • Buyers and sellers hold asymmetric views about whether their counterpart is trustworthy, and those asymmetries persist through the transaction.
  • The asymmetries influence behavior in both directions, producing tendencies both to deceive and to guard against deception.
  • Beliefs about whether a counterpart is trustworthy and trusting are often erroneous.
  • Selecting a buyer on the basis of trust increases rather than diminishes an entrepreneur’s vulnerability.

In practice

  • Negotiate the same protections with the buyer you like as with the buyer you do not. If a commitment about your employees matters to you, it belongs in the document, not in the relationship.
  • Treat a buyer’s warmth as pleasant rather than as evidence, and notice if it is arriving in place of specifics.

Where authorities disagree

Read directly against Graebner and Eisenhardt’s own courtship study on this shelf, which shows sellers being genuinely pulled toward buyers offering organizational rapport, and finding that trade worth making. The two are not contradictory so much as sequential: rapport is a reasonable basis for choosing whom to negotiate with, and a terrible basis for deciding how carefully to negotiate.

Acquisition Conciergeorientation · not legal, tax or valuation advice
Happy to dig into it. What would you like to pressure-test from Caveat Venditor: Trust Asymmetries in Acquisitions of Entrepreneurial Firms: one of its propositions, how it applies to your situation, or where it disagrees with the rest of the shelf?