6 common deal breakers for technology companies

March 2, 2022 Bobby Tong

The process of selling a technology company may take up to one year, but there are a number of challenges that can crop up before the deal closes.  If you’re considering selling your company, you should know some of the reasons why a deal could fall apart. Here are the six most common reasons why the sale of a tech business fails:

1. Unrealistic expectations
Tech company owners often believe the value of their business is higher than its actual worth. The assumption they have about the value of their business can be due to an emotional attachment or the use of large public company metrics for a private company, which isn’t always a proper comparison. An advisor’s understanding of the current market environment can help in setting ambitious but realistic sale expectations.

2. Not having proper financial reporting standards
Many potential acquirers are interested in technology companies with a great product or offering. However, a significant deal hurdle can be created if a potential seller isn’t able to produce accurate and timely financial information. An acquirer wants to buy a company with proper financial reporting and compliance standards in place. Many founders don’t realize this until it’s too late and deal momentum has been lost.

3. Financial performance through a deal 
Technology companies are known for their ability to scale at an accelerated rate versus businesses in other sectors. If an investor arrives at a given valuation based on certain near-term growth projections, a company’s performance and momentum need to deliver relative to those projections as the deal is being negotiated or it could put a deal in jeopardy. 

4. Impact of SR&ED
The Scientific Research and Experimental Development (SR&ED) program is a government program many technology companies—particularly private companies—rely on to fund their business at certain stages of their lifecycle. It’s important that a company can demonstrate that their business model doesn’t rely on this funding to be profitable as a foreign buyer may no longer meet the eligibility requirements for SR&ED in certain cases and lose this source of funding.   

5.  Technical or code debt
Technical debt is a concept in software development that reflects the implied cost of additional rework caused by choosing an easy solution now instead of using a better approach that would take longer. As a change is started on a codebase, there’s often the need to make other co-ordinated changes in other parts of the codebase or documentation. Sellers typically don’t believe they have technical debt, but if a code review as part of due diligence finds significant technical debt, it will result in a difficult conversation.

6. Lack of shareholder alignment
Technology companies can have a number of funding rounds, which broadens the shareholder base over time. However, this will lead to a more complicated and diverse share structure as multiple shareholders may have different goals and objectives. This capital structure needs to be navigated to ensure all shareholders are aligned as a founder contemplates pursuing a transaction.

How we can help
Our M&A and Capital Markets and Tax teams support owners when selling their business. We provide strategic advice before, during, and after the transaction process. Think of us as a one-stop shop. Contact us to find out how we can help. 


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