A new survey has revealed the financial risks that tech businesses face when their founders put them up for sale.
The survey, based on a poll of 2,000 people, found that more than four in 10 people would assume a business was in financial difficulty if they heard it was going through a sales process.
That was the case even if “the company was actually in a very strong financial position,” according Jordan Greenaway, a Partner at Transmission Private, the communications agency that conducted the research in collaboration with polling firm OnePoll.
“People automatically jump to the conclusion that a business is up against the wall if it’s up for sale. Employees, partners, and investors all immediately leap to this judgement,” said Greenaway.
The survey results come at a time when many tech entrepreneurs are starting to consider selling their businesses.
Recent data from private bank Lombard Odier found that nearly seven in 10 entrepreneurs were considering selling their businesses now or in the future, off the back of the pandemic.
The tech industry is also currently going through an M&A boom. In the first half of 2021, tech deals totalled $671 billion globally, according to data from Refinitiv, a record for the sector.
The research also highlighted the potential ramifications of employees, investors, and suppliers jumping to such negative and potentially misguided conclusions.
“There’s a huge amount of activity taking place in the tech sector at the moment. Many tech entrepreneurs are starting to explore selling out,” said Luke Thompson, another Partner at Transmission Private.
“But if people assume a business is in difficulty it could lead to a serious crisis in confidence. If suppliers lose confidence, they may stop providing products and services. Employees may start looking around elsewhere. Financial partners may start putting pressure on the company to shore up cash reserves.
“Ultimately, this could lead to a deterioration in the underlying asset value of the business,” continued Thompson.
The research also showed that stakeholders would look most positively on tech entrepreneurs who said they were selling their business to retire. Nearly 50% of survey respondents said they would look positively on entrepreneurs selling out to retire.
Other reasons, such as changing career (14%), wanting to start a new company (14%), and focussing on other business interests (21%), were looked on much less positively.
Perhaps surprisingly, the public also looked relatively positively on entrepreneurs who said they were exiting their business to crystallise their wealth. Respondents saw this answer as refreshingly candid, honest, and upfront, according to the research.
“Tech entrepreneurs are understandably private, but speculation gathers in a void. Founders need to take the time to answer the difficult questions that a potential sale will undoubtedly trigger about a business before it leaks. The stakes are too high to get it wrong,” Greenaway added.