42 | Where Software M&A Deals Typically Fall Apart

Summary

Podcast Summary: The Path to Exit – Episode 42

Episode Title: Where Software M&A Deals Typically Fall Apart
Host: Mike Lyon (Vista Point Advisors)
Guest: Scott Austin (Managing Director, Vista Point Advisors)
Date: July 21, 2026

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Episode Overview

This episode of "The Path to Exit" focuses on the common pitfalls and failure points in software and technology M&A (mergers and acquisitions) transactions. Host Mike Lyon and guest Scott Austin dive deep into the process of selling a software or internet company, with particular emphasis on where deals most often unravel, what diligence issues arise, and actionable steps founders can take to create a smoother path to closing.

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Key Discussion Points & Insights

1. Where Deals Most Often Fall Apart

• Deal Process Stages:
  Scott outlines a four-stage process:
  1. Data Preparation (before talking to buyers)
  2. Marketing Process (leading to indications of interest)
  3. Diligence (culminating in LOIs—Letters of Intent)
  4. Exclusivity and Closing
• Highest Risk Stage:
  “That final stage that I mentioned is where most deals fall apart. And it's also why we try to structure a process that makes sure that all exploratory diligence is done prior to exclusivity.” – Scott Austin [01:20]
• Why?
  The longer a deal remains in exclusivity, the higher the risk. This is referred to as “time kills all deals.”

2. Buyer Diligence Ramps Up Over Time

• Early Stages:
  Mostly seller-provided info; buyers do minimal diligence at first.
• Late Stages:
  Intense diligence, more buyer-initiated discovery, and higher risk of misalignment or “goalpost moving” (buyer attempting to renegotiate based on new findings).
• “Typically, the closer you get towards the end, that's when the most diligence is being done.” – Mike Lyon [02:05]

3. Preparation is Paramount

• Proactive Document Organization:
  Founders should have data, legal docs, and contracts ready before the process heats up. This supports quick and accurate responses later.
• “A great part of doing so is doing the upfront preparation work, whether it's data related or related to legal customer contract documentation or any other areas there too.” – Scott Austin [02:51]

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4. Most Common Deal-Breaking Issues

a) Accounting and Financials

• Sell-Side Quality of Earnings (QofE):
  A mini-audit conducted before launching the process, giving confidence in the numbers.
  • “Maybe in a third to a half of our transactions we do what's called a sell side quality of earnings upfront…” – Scott Austin [03:39]
  • “You want to make sure that you have a really clean monthly revenue by customer file…” – Scott Austin [03:58]
• Importance of GAAP:
  Buyers (especially public or institutional) prioritize GAAP financials rather than cash accounting.
• Biggest Risk:
  Misaligned or sloppy numbers can lead to re-trades or complete deal collapse.
  • “I'd say that's the most common area where you set yourself up for a retrade and it's solely just not being prepared upfront.” – Mike Lyon [05:18]

b) Projections

• Be Conservative, Build Trust:
  Overly aggressive projections can backfire if not met.
  • “You want to be presenting at least 97, 98% confidence that you're going to hit your numbers by the end of the year.” – Scott Austin [06:38]
• Buyers Judge Process on Performance:
  Missing projections causes trust issues and price renegotiations.
  • “The best thing that you can actually do in a process is improve your projections throughout the process based on your monthly performance.” – Scott Austin [06:59]

c) Technology Diligence

• Tech Debt and Security:
  Issues such as outdated tech stack or potential vulnerabilities can be discovered late and derail deals.
  • “If there's any recent vulnerabilities that are cited, that's when you can open yourself up to… potential security issues that could kill a deal altogether.” – Scott Austin [07:56]
• Timing:
  Private equity firms often wait until the end to do deep tech diligence.

d) Market and Customer Diligence

• Market Work:
  Private equity buyers especially need to understand the market; lack of prior sector experience increases risk.
  • “This is one is the seller. It's malpractice almost if a deal falls apart over that.” – Mike Lyon [09:24]
• Customer Calls/Surveys:
  Feedback from key customers can uncover churn risk or competitive threats (e.g., cheaper AI alternatives).
  • “If it becomes apparent that maybe one or two of those customers are at risk of churning, that can present a lot of other risk as well…” – Scott Austin [10:31]

e) Founder Background Checks and Legal Issues

• Deep Dives:
  Buyers conduct thorough background checks late in the process.
  • “This is one where you just want to get ahead of it and make sure you're communicating with the buyer, anything that could have come up in your past.” – Mike Lyon [11:18]
• Lawsuits and Legal Exposure:
  Undisclosed legal issues (lawsuits, etc.) can be a deal-breaker rather than just a price adjustment.
  • “If there's some lawsuits or potential lawsuits, you want to make sure you bring those up at the right time and not let those be discovered by buyer in diligence…” – Mike Lyon [11:58]
• IP Ownership:
  Buyers must feel certain the IP is truly owned by the selling company.

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5. Managing Exclusivity to Avoid Broken Deals

• Shorten Exclusivity as Much as Possible:
  Loss of leverage occurs when in exclusivity—the period should be used only for final confirmatory diligence and paperwork.
  • “Once you are in exclusivity, you lose all of your leverage. ... No buyer is ever going to say, oh, we just found out this about your company, we want to pay you more.” – Scott Austin [13:41]
• Front-Load Diligence:
  Try to complete as much technical, accounting, and market diligence as possible before entering exclusivity.

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6. Best Practices for Preparation and Process Management

Before Going to Market

• Thorough Prep:
  Compile clean, accurate financials, legal docs, customer contracts, and supporting market research.
  • “You can populate a larger data room and ... when we are going through the process and getting a lot of requests, we've already pre done the work.” – Scott Austin [15:13]

During the Process

• Timeliness and Responsiveness:
  Respond quickly (ideally within a day or two) to diligence requests.
  • “If it takes us a week or two for a particular diligence request... you create risk and you lose momentum…” – Scott Austin [16:15]
• Internal Deal Team:
  Involve select team members to help manage requests efficiently (three to five is optimal).
  • "We oftentimes view internal deal teams in the three to five employee count perspective as being the sweet spot…" – Scott Austin [17:13]
• Accuracy:
  “Anytime you give inaccurate data to anyone, they just start asking more questions. That's just human nature.” – Mike Lyon [17:36]
• Momentum is Critical:
  Fast, organized processes (ideally 3-4 months) are much less risky than drawn-out (6-8 month) ones.

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Notable Quotes

• “Time kills all deals.” — Scott Austin [01:37], [16:09]
• “No buyer is ever going to say, oh, we just found out this about your company, we want to pay you more.” — Scott Austin [13:51]
• “You want to be presenting at least 97, 98% confidence that you're going to hit your numbers by the end of the year.” — Scott Austin [06:38]
• “It's malpractice almost if a deal falls apart over that.” — Mike Lyon, on market diligence with PE buyers [09:24]
• “Anytime you give inaccurate data to anyone, they just start asking more questions.” — Mike Lyon [17:36]

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Timestamps for Key Segments

• 01:04 – Four Stages of the M&A Process; Where Deals Most Often Fall Apart
• 03:23 – Common Areas Where Deals Break or Price Changes
• 03:39 – Accounting Diligence and Sell-Side Quality of Earnings
• 06:00 – Projections and the Risk of Over-Promising
• 07:24 – Technology and Market Diligence Risks
• 09:24 – Importance of Market Work for PE vs. Strategic Buyers
• 11:03 – Founder Background Checks and Legal Surprises
• 12:27 – Dangers of Exclusivity and Loss of Leverage
• 14:41 – Concrete Steps for Upfront Preparation
• 16:09 – How to Move Through Diligence Efficiently
• 17:36 – Importance of Accuracy and Fast Response

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Memorable Moments

• The emphasis on how even experienced founders can underestimate the importance—and risk—embedded in the exclusivity period.
• The practical advice about internal deal teams and how, for confidentiality yet efficiency, “three to five employees” involved is usually optimal.
• Direct comments about “malpractice” if a deal falls apart over market work, underscoring founder accountability in preparation.

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Takeaways

• Preparation Is Everything: Clean numbers, readiness, and honest communication are vital.
• Speed Matters: Months-long delays make deals riskier and less likely to close.
• Be Conservative, Not Overly Optimistic: Both in projections and representations.
• Leverage Before Exclusivity: Once in exclusivity, sellers lose leverage, so front-load diligence.
• Transparency Reigns: Disclose issues early and control the narrative.

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This summary captures the core insights and actionable advice for founders navigating the SaaS and technology M&A process, as discussed by veteran advisors Mike Lyon and Scott Austin of Vista Point Advisors.

Transcript

[A]

Welcome to the Path to Exit, a podcast to help software and Internet founders understand the process to raise capital or sell their business.

[B]

Hello and welcome everyone. I'm Mike Lyon, Founder and managing director at VistaPoint Advisors, and this is the Path to Exit. This show is dedicated to helping founders of software, AI and Internet businesses understand what it takes to raise capital or sell their business and how to do it well. My guest today is Scott Austin, managing director of VistaPoint Advisors. In this episode, we'll discuss where deals most often break down, the issues that tend to surface during diligence, and how founders can prepare so the process holds together all the way to close. Please enjoy my discussion with Scott. Scott, welcome back to the podcast.

[C]

Thanks for having me back on so

[B]

this is a topic we end up talking to founders about a lot. So start at a high level. When does the deal typically fall apart? Is it at the beginning, the middle of the end? And when do things really go off track in the transaction? Most of the time?

[C]

It's a good question. We generally look at a process as being in four stages, right? So there is the data preparation stage up front before you are live and talking to folks. The second part of the stage is the marketing process that generally culminates in indications of interest. After there is when we shortlist a group of parties to move forward into the next diligence stage, which culminates with getting Lois and then eventually out of there is when you are signing an LOI into exclusivity and trying to close a transaction. That final stage that I mentioned is where most deals fall apart. And it's also why we try to structure a process that makes sure that all exploratory diligence is done prior to exclusivity. And the exclusivity process at the end is really truncated down to just pick tapering the transaction and getting to a closed deal as quickly as possible. Because the longer an exclusivity period is, the more time that you open yourself up for deal risk and you hear the proverbial phrase time kills all deals. So in the end, that's ultimately the stage of the process where there's the most risk that you want to shorten it in the smallest time period.

[B]

And I think it's worth just pointing out that if you think about the trajectory of the process, in the early part of the process, the seller is providing information to the buyer and at the very beginning of the process, the buyer's not doing a ton of diligence. They might be doing some market work as the deal progresses and you get into the heavy diligence phase. That's when they start, in theory, uncovering things that they either don't like, or it could even be a little bit different than what the seller framed the business or the data they gave. So typically the closer you get towards the end, that's when the most diligence is being done. And that's when there's a chance for a misunderstanding or in some cases it's just a strategic play by a buyer if they have a seller in exclusivity to try and move the goalposts a little bit. But typically you don't see deals fall apart upfront. There's not really a deal upfront.

[A]

Right.

[B]

You're in the marketing phase.

[C]

But there is a lot that you can do in that upfront data preparation phase to reduce potential issues later on in the process in terms of just getting data in order, getting all of your documents in order. Because once you're under the proverbial gun later on when you're in exclusivity, you want to be able to quickly respond to requests and be able to efficiently answer questions. And a great part of doing so is doing the upfront preparation work, whether it's data related or related to legal customer contract documentation or any other areas there too.

[B]

Absolutely. Let's maybe talk a little bit about some of the common areas where we actually see a deal break or the price change be so much that a deal can't get done. We're just going to talk you through some of these common areas and what tends to happen. Let's start with accounting. What typically happens in accounting.

[C]

So I would say maybe in a third to a half of our transactions we do what's called a sell side quality of earnings upfront, which is essentially a mini audit in terms of accountant reviewed numbers to make sure that the numbers are the numbers and that we can move that risk away for it to later be discovered in diligence that we are doing, whether it's rev rec wrong or other areas of our accounting diligence incorrectly, which obviously can open you up for reprice discovery in a later stage. So that is a large area and the key parts there that you want to make sure that you are doing is that you indeed have GAAP financials, ideally back for a few years, and you want to make sure that you have a really clean monthly revenue by customer file and want to make sure that you're able to update those throughout the process. Because a lot of times what you will be graded against obviously is you'll be compiling projections for your end of year and future years at the beginning of a process and throughout the process you will be judged against those projections and how you're performing against those. So making sure that you have your accounting documents and your numbers really buttoned up, heading into a process is key because the second that people start noticing either softness in your numbers or, or not a general understanding of how your business is performing, that's when it will open up questions and diligence can become a little shakier.

[B]

And I think where this one's really confusing for founders is a lot of founders are obviously focused on more like cash basis accounting or other metrics they care about to track the business. Not necessarily like the GAAP numbers, however, public buyers and investors are, I wouldn't say solely focused on those, but that is a really important metric for them. And so this is an area where if you don't have a good handle on your accounting and you communicate the numbers are X and then they're going to hire accountants, no doubt whose whole job is to look for these inconsistencies. I'd say that's the most common area where you set yourself up for a retrade and it's solely just not being prepared upfront. And so that's an area you want to get smart on. Understand what you need to do and

[C]

just your preparation there on that. And you know, in case people are curious, as I mentioned about third to half the time we will have our clients do or they'll ultimately decide to do a sell side quality of earnings to get that accountant stamp on their numbers. Generally if you have concerns about your numbers, those are things that cost somewhere in the like 40 to 100k range prior to launching a process.

[B]

And I would say a good banker can look at your numbers and help you decide if you need to get one. Just based on obviously bankers have seen a lot of these and understand the risks involved. Separate but related. One is the projections. And the thing I would just say here is a lot of folks under the impression you just project as high as you can. That doesn't really play out in PE and strategic deals the way it does in like a traditional vc, you know, hockey stick pitch. So Scott, talk a little bit about what happens with projections and how that can be a risk.

[C]

Yeah, and obviously it depends on kind of where you're launching a process within the calendar year. But our advice to clients is always, even if there's very lofty goals there, it's that you want to be presenting at least 97, 98% confidence that you're going to hit your numbers by the end of the year. The worst thing that you can do is if you start trailing behind your projections by missing numbers for consecutive months, not only will you lose interest, but eventually within the exclusivity period, you open yourself up to potential price rediscussions once people find out that you are no longer going to hit their numbers that you've guided them towards in terms of their expectations. So the best thing that you can actually do in a process is improve your projections throughout the process based on your monthly performance. So it's a lot better to be conservative on your projection levels than it is to shoot for the moon and come up short, because it will also just start the relationship off in a poor way where they don't know where trust levels are either.

[B]

Absolutely. Couple other areas here. Maybe talk a little bit about tech diligence and market diligence. Like how does that play out in a process and is that more of a retrade item or a total deal falling through items generally.

[C]

You might hear the term tech debt, which is something that you should consider going into a process in terms of how modern's your tech stack, where there's potential vulnerabilities. Where I've seen any of this work happen before is if there's any data breaches, they'll work with a business like SEMA or someone like that to do like an open scan or software code base check. And if there's any recent vulnerabilities that are cited, that's when you can open yourself up to not just tech debt conversations, but also where there could be potential security issues that could kill a deal altogether. So tech is a large portion, I think a lot of founders, they'll be surprised that tech diligence a lot of times, especially with private equity firms, maybe less so than the larger strategic buyers. Tech diligence is held off to the very end of the process and the first few stages is mainly around customer data, financial data, accounting data, and more company organization specific data. But tech at the end can ultimately be a deal breaker in terms of market work. This is where we oftentimes do put strategic deals on a pedestal compared to standalone private equity deals where they haven't done work in specific market sectors because that is an area of diligence work that all parties do. If you are looking at a strategic deal, whether you are a private equity add on or as a larger strategic business that already operates in your sector, they've Effectively already done the market work and believe in the market and the tailwinds there. If it's a firm that doesn't have much industry experience within your certain subsector, the market work done at the end of the transaction can be a big dictator around just whether they want to do a transaction or not. If they learn certain things about various headwinds in the industry or budgetary constraints or any other concerns that might prop

[B]

up, and I would just say that this is one is the seller. It's malpractice almost if a deal falls apart over that. With a private equity firm, you have to know that market work is really important and that work should be done well before you entertain exclusivity. A buyer needs to know they like the market. Now, as Scott said, with a strategic, it's usually not a risk. The only place it could be a risk is if you're selling it to a much larger strategic that doesn't really have a solution anywhere adjacent. And they don't really know the market that well and they're going to do some diligence there. But usually the market work can be something where the deal just blows up because it's a TAM issue if they don't think the market's big enough.

[C]

And oftentimes as part of the market work, they'll do customer calls or like customer surveys where they're trying to get feedback around your specific product capabilities compared to other businesses that you compete against, and then also just other trends within the subsector in the industry. And that's an area that can open up diligence risk as well as oftentimes, especially in like today's market in terms of whether there's any AI native, incumbent or cheaper AI solutions that can displace your product. But it can also uncover potential customer churn issues as well. Generally in a private equity deal or a strategic deal, at the end they'll try to do five to 10 customer calls. They'll find a week or two of the deal, and if it becomes apparent that maybe one or two of those customers are at risk of churning, that can present a lot of other risk as well that you might not have perceived received and can then lead to either escrow conversations around the renewal of those customers or just deal risk in general. But that generally comes up in that market and customer work.

[B]

And then the last couple of things I would say that come up every once in a while are founder background checks. So we've worked on deals where, you know, you kind of ask the founder is There anything we should know or prep the buyer for, and then this stuff comes out later because they run really deep background checks towards the end of the process. This is one where you just want to get ahead of it and make sure you're communicating with the buyer, anything that could have come up in your past. So, A, you can control the narrative and B, not let them be surprised by it, because if they're surprised, it really drops their level of trust. And so you may not disclose something like that to all the buyers, but it's something you're going to want to talk to them about and control the narrative because they are going to find those kind of things. We've actually had deals blow up over that at the very end, particularly with a big, large strategic who just couldn't get comfortable. The last one would just be any legal issues that would come up. And again, there's a time and a place to disclose these, but this is something you just want to know where the issues are. Most of the legal diligence is pretty standard and there's not a lot there. But if there's some lawsuits or potential lawsuits, you want to make sure you bring those up at the right time and not let those be discovered by buyer in diligence, because those are the things that aren't really like a retrade or a price chip that might speak more. Did they want to do a deal at all just because they get spooked by some of those things?

[C]

And the last one there is just a combination of tech and legal, which is just around IP ownership and needing to be able to confirm that the IP is owned by the company.

[B]

Yep, absolutely. One of the things that founders underestimate the most is just how risky exclusivity is. You have a term sheet in front of you and you're talking about the exciting stuff, valuation structure, rollover. A lot of times founders just take the exclusivity for granted, but it's actually closely tied to how likely a deal is to close. So, Scott, maybe talk about exclusivity, what it means and how we think about managing that and how it can create an issue around deal closing for founders.

[C]

Yeah, key part about our process is that we ultimately want to hold off exclusivity as long as possible and shorten that period as much as possible. Obviously, the reason's not to not get a deal done. It said, ultimately, we want to make sure that all exploratory diligence has already been done before entering into exclusivity, so that it's Ultimately, just papering a transaction and confirmatory diligence with third party vendors at that point. It's oftentimes too, why, when we're talking to private equity firms or strategic buyers, if they're willing to engage third party, whether it's tech diligence, market diligence, accounting diligence prior to the LOI date, note of exclusivity, that ensures that when we do go into exclusivity at the end of the deal, they have full knowledge and full understanding of the business and potential risks. So that when we sign into exclusivity, it's really just focused on only the purchase agreement at that point and getting the deal done. Once you are in exclusivity, you lose all of your leverage. You know, the best thing that can happen is that you're closing the deal that you previously agreed upon. No buyer is ever going to say, oh, we just found out this about your company, we want to pay you more. So ultimately what you're trying to do during that exclusivity period is minimize any potential negative news that could come out. So if it's a 10 day period versus if it's a 45 or 60 day period, that obviously is a much shorter time zone for a large customer to churn for any sort of security issues to occur. And so by pushing that part of the process and doing more confirmatory diligence upfront before the final exclusivity stage, that just limits any potential bad news that can come out. And that's our goal at the end of the deal is when we do go into exclusivity, it's to sign an LOI and to close on those agreed upon terms in the quickest period after.

[B]

Great points. Let's maybe flip over to preparation. So what can a founder do upfront and during the process to make sure they minimize the chances that there's a broken deal or bust a deal at the end of the process.

[C]

Yeah, and we touched on this a little bit obviously when we discussed the quality of earnings. I mean, that's one particular way with accounting diligence upfront. If there are particular concerns there. But having really clean financials, whether it's past audited numbers, whether you have a confident, truly certified accountant that's doing the books, you can populate a larger data room and it doesn't need to be through one of the formal VDR providers. But whether it's an internal Dropbox or Google Drive, with all of the upfront legal diligence, financial diligence, customer level contracts, various market work or research that you've done. And that's what your banker and what Vista Point would help you prep upfront. So that when we are going through the process and getting a lot of requests, we've already pre done the work. And not only doing the work upfront, but you can also start to understand where there's potential risks up front and we can work to mitigate those versus saving them as surprises later in the process.

[B]

And then once you're live, maybe just talk about what separates founders who get through the diligence cleanly from maybe those who struggle and not necessarily mean you don't get a deal closed. It just takes a lot longer. It's more arduous. What can a founder do during the process just to make sure they're on the getting through the process cleanly side.

[C]

Yeah. And again, time kills all deals. So it's much better to be performing a really streamlined 3 and a half, 4 month process than a 6, 7, 8 month process where it takes a lot of time to get data responses back to parties. So what we want to do once we've hit that marketing phase is be delivering the stages on monthly timelines. So the key is that we are providing monthly updates as we're going through the process on financial customer level information. If it takes us a week or two for a particular diligence request to get those answered, we are already kind of behind the ball and you create risk and you lose momentum with certain buyers and investors in the process. So what you ultimately want to make sure that you're doing is being able to answer things in a fictitious timeline. A key way to do that is by bringing other folks on your team into the process with you. A lot of founders that we talk to, obviously it's a, it's a sensitive topic of selling your company. A lot of times they might want to do it with only themselves or their co founders, but a lot of times expanding some of the data collection to whether it's one person in the finance department, one person in the tech department or in HR that can help dictate what specific diligence items need to get responded at certain times and who's managing those internally. So we oftentimes view internal deal teams in the three to five employee count perspective as being the sweet spot for who's clued in the transaction.

[B]

Yeah, just being expedient with the data and accurate. Anytime you give inaccurate data to anyone, they just start asking more questions. That's just human nature. That's how it works in today's episode, we explore where deals tend to break down and why the most common issues that surface during diligence, and how good preparation can help position founders to move through the process with fewer surprises and more leverage and hopefully avoid a broken deal or a retrade. Scott, thanks for joining us on the podcast.

[C]

Thanks for having me. Look forward to the next one.

[A]

Disappoint Advisors is a founder focused investment bank that advises software and Internet founders through M and A and capital raised transactions. We are a fully unconflicted investment bank who only works for founders on the sell side, so you know that we're always representing your best interests. Security is offered through VistaPoint Advisors member Finra Sipic. This has been provided for informational purposes only. It is not intended to address all circumstances that might arise. Testimonials from past clients may not be representative of the experience of other clients and there is no guarantee of future performance or success. Clients are not compensated for their comments. If you have any questions about the process of selling your business or raising capital, reach out to a member of our team or check out the four Founders section of our site by visiting four Founders Guide.