What is Sandbagging?

Sandbagging is a term used to describe when a company deliberately seeks to lower the expectations of its stakeholders in order to achieve greater-than-expected results.

In other words, it’s a business strategy focused on under-promising and over-delivering. Typical examples of sandbagging include when a company deliberately fails to disclose notable deals or underestimates its quarterly or yearly earnings to investors and shareholders. It’s generally considered inadvisable to engage in sandbagging given that it involves manipulating expectations to gain an advantage.

Sandbagging is also used by companies in asset purchases. However, it’s not just companies that use this strategy to their advantage — individual employees do as well. For example, an employee may downplay their expertise in a certain area so that they can impress their manager when they end up performing better than expected.

Why do companies choose to sandbag?

The main reason companies use this strategy is to exceed stakeholders’ expectations. If a company can over-deliver on its promises or projections, it places itself in a better position with investors and shareholders than if it simply met their expectations (or did not meet them at all).

Some startups engage in sandbagging in an effort to lowball investors and shareholders about their potential for profit and growth. Again, the line of thought here is to benefit from under-promising and over-delivering.

A startup that surpasses investor and shareholder expectations is far more likely to stand out as a promising new business compared to one that “only” achieves what it’s expected to, if that.

Sandbagging also offers companies the opportunity to minimize the stress associated with important deals. For example, if a company doesn’t want to invite pressure from investors regarding a significant deal it has in the works, they may sandbag them in the hopes of keeping the pressure off.

Sandbagging in asset purchases

Sandbagging also has applications in asset purchases. In this context, sandbagging refers to the act of a buyer intentionally not informing a seller of critical errors it has identified before proceeding with the purchase.

By omitting their knowledge of such errors, the buyer has the leverage it needs to make an indemnity claim against the seller after the deal has gone through.

To avoid being sandbagged in this way, businesses seeking to sell assets to another entity should look out for “sandbagging clauses” (sometimes called “pro-sandbagging clauses”) in any acquisition agreements they are a party to. They may also wish to consider adding an “anti-sandbagging provision” to prevent sandbagging in the first place.

Risks of sandbagging

There are significant risks associated with sandbagging, particularly when it’s done repeatedly. The primary risk is that investors will catch on, which could have disastrous consequences for the company. For instance, they could lose trust in the company, which may in turn cause stock prices to fall.

Even if investors fail to catch on, they may notice that the company consistently exceeds expectations. As a result, investors raise their expectations, making the company’s attempts at sandbagging futile.

Sandbagging can also put a company’s reputation in question. After all, this strategy is generally looked down on in the business world. So if a company is caught out, there is a good chance that it will face significant backlash, which could ultimately impact its bottom line.

Examples of sandbagging

To better understand what sandbagging is, it’s helpful to consider some hypothetical examples of this strategy in action.

Imagine that a business has a number of multimillion dollar deals it will close on soon. The company’s investors have long been waiting for the company to get more funding, to no avail. Knowing this, the company chooses to not disclose the upcoming deals with them.

As the company kept its investors completely in the dark, the investors didn’t expect the business to achieve such success. Their expectations of the company’s performance therefore remained unchanged or possibly even lower with a lack of news.

When the company eventually informs the investors of the news, the investors’ impressions of the business’ performance have far surpassed their original expectations. By implication, the company’s performance appears to be far better than anticipated, which may in turn renew investor confidence.

Sandbagging is an important strategy for investors and businesses alike to understand. It refers to the deliberate act of lowballing stakeholders, with the goal of exceeding their expectations. It can also be used in asset purchases, as well as by employees.