Sandbagging Meaning In Sales Business M A Startups

Sandbagging Meaning

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Through sandbagging, to be more precise, executives and managers play safe as the expectations of the shareholders and investors are low, and target accomplishment is easier for them. As a result, when the managers record higher-than-expected results, they remain in the good books of the higher authorities.

How Does Sandbagging Work?

Sandbagging is one of the most common practices in the corporate world where employees, including managers, pretend to possess and showcase lower capabilities than what they actually have. This, in turn, prepares the business owners, shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more, and investors to expect less. As a result, they frame strategies keeping that particular success mark in mind. In reality, however, the managers and employees happily put lower effort and accomplish slightly better results than the authorities expect.

Key Takeaways

Sandbagging is a strategy that businesses use to showcase their fake lower capabilities to shareholders/investors so that the latter’s expectations remain limited.When sandbagging companies, managers, or executives perform better than the expectations of their higher authorities, it helps them build their goodwill.Though the process seems effective in lowering the authorities’ expectations, it tends to become ineffective gradually.Some of the areas where the process works include – stocks, businesses, sales, mergers and acquisitions, and startups.

This safe game keeps the shareholders satisfied and works for the teams working on certain projects as members become eligible for incentives, rewards, and bonuses for their performance. Above all, the companies become more reputed for achieving more than they aspired to.

Application Areas

It is vital to be aware of the applicability areas to understand the sandbagging definition well:

Stocks

When the shareholders’ expectations are met, their level of trust in the company increases. As a result, investors gain confidence and start making investments, which raises the stock prices, indicating the better performance of the business.

As the companies pretend to be less productive than they actually are, they prepare their reports accordingly. When the annual reportsAnnual ReportsAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more of any company mark an above-average growth, shareholders are happy to see results exceeding their expectations. Naturally, this leads to an increase in the share price.

Business

Sandbagging is a very common phenomenon in any business. The businesses never show their real abilities to ensure that the shareholders’ expectations align with what the former can easily achieve. Though the process works the best in keeping the companies safe and helping them gain the confidence of the shareholders and investors, there comes a time when the same set of stakeholdersStakeholdersA stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes.read more start expecting performances beyond what they expect every time.

As a result, there is a time when their expectations are higher than what the companies can achieve. Thus, it is recommended to consider sandbagging to a limit and make sure the shareholders’ expectations remain achievable at different times.

Sales

The sales executives handle immense pressure because of the set targets. Therefore, in the sales department, people tend to participate in a rat race to ensure they achieve their targets and become eligible for the daily, weekly, monthly, quarterly, or annual incentives – whichever is applicable.

For these sales personnel, sandbagging comes out to be the best tool to keep the expectations of the management within limits. With the help of sandbagging in sales, the professionals pretend to be less capable of achieving the set targets, reducing the level of expectations of the managers. As per their assumption of the salespeople’s abilities, they prepare themselves for a limited number of targets to be achieved. As a result, when the sales executives’ performance goes beyond expectation, their efforts are recognized.

M&A

In a merger and acquisition dealMerger And Acquisition DealMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more that occurs between the acquired company and the acquiring company, a purchase agreement is prepared that contains a pro-sandbagging term. This sandbagging clause protects the purchaser’s interest or the acquiring company. In such an M&A deal, the seller should disclose all accurate information related to the mergerMergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more or acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more of the company.

However, the seller sometimes misses disclosing important information to the buyer or voluntarily hides it. Under the sandbagging M&A clause, the purchaser or the acquiring company has the right to recover the potential losses incurred due to the missing information.

Startups

People launch a startup business to make it successful and produce better than expected results for the investors who have shown faith in the business. When the investors trust a new venture, it is obvious for them to expect a good performance in return. After all, the performance in the initial years helps investors decide whether to continue investing in the business and hold the company’s stocks or skip it.

Startups introduce the sandbagging strategy in their setup to gain the trust of the shareholders and keep them happy. They give the earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more updates and estimates below what they hope to achieve in the future. Hence, when the achievement is better, the managers and the company look as if they overperformed and went beyond shareholders’ expectations. Once the startups prove their consistency and goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more in the market, more investors are willing to invest in their shares.

Example

Let us consider the following example to understand how the concept works:

Suppose company ABC Ltd scheduled the release of its analyst report in a few weeks. It decides to use it as a tool to control its shareholders’ expectations. The firm asks the in-house analysts to make a forecast stating the company’s stable growth in their reports. In contrast, the reality is that the company has been earning profits in double digits over the past year. The report, as a result, keeps the expectations of the shareholders in line with what the company wishes.

When the company marks a better result than expected, it becomes more reputed in the market.

Does Sandbagging Work?

Undoubtedly, sandbagging can effectively keep companies, managers, and executives in a safe zone. However, using this strategy for a longer span can be difficult.

If companies continue to give lower than expected forecasts about their earnings or revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more, they will appear consistently overperforming. It is likely that the shareholders’ expectations will keep rising, making them expect more than what people promise. As a result, shareholders might expect more than what firms can realistically achieve.

Another repercussion of the process could be the complete opposite of the above. In this case, shareholders and investors would keep adjusting their expectations in line with the company’s actual performance. As a result, they will ignore the public announcements about the expected or sandbagged earnings and revenue results. In short, the companies will no more be willing to grow or progress.