UK startups relying on M&A to shield valuations
Amidst rising inflation and interest rates, investors across the board have seen substantial stock losses and falling valuations, resulting in a highly risk-averse investment environment. As smaller companies struggle to reach or maintain profitability, they often risk going through an unsuccessful funding round at a time when investors are increasingly turning their gaze towards profitable balance sheets over attractive narratives. This has become a rule of thumb in the startup arena with a plethora of tech giants such as Klarna, seeing their high valuations drop by 85%, from over $45.6 bn to $6.7 bn.
Business advisory, Trachet, highlights the increasing trend of companies turning towards M&As in the current climate as a way to expand their offering and customer base, ultimately increasing their valuations and strengthening their position. However, data from Harvard Business Review illustrates that a staggering 70-90% of M&A fall through, even during the best economic conditions. In light of this, Claire Trachet – leading M&A expert and CEO/Founder of business advisory, Trachet – explains why this number is so high, and how startups can ensure their particular deal gets over the line.
Trachet argues that it was a “volume culture” that began post 2009 amongst the big firms that led to so many M&A falling through. Due to the insecure nature of these deals, companies would take on as many clients and prospective deals as possible so that if one fell through, there would still be income from another transaction. By taking on a smaller advisory firm, founders are weighting the odds in their favour, as all of the adviser’s resource is likely going to be placed on that one M&A. Choosing the right partner to guide you through the process forms one important part of getting a deal over the line, but it’s also vital be informed as a founder too. With that in mind, Trachet shares some of the most common stumbling blocks for startups amidst the current M&A market, and explains how to combat them.
Due diligence is an opportunity – not something to be afraid of:
“The majority of deals fall through at the due diligence phase. Most commonly, this is because startups have not enlisted expert advice early enough to help them identify and resolve any issues. Contrastingly, rather than a part of the process to be afraid of, experienced advisers can actually even add value to a deal during the due diligence process, rather than have it slashed or thrown out entirely. The simple message here is prepare early, and bring in the right people to help you conduct ‘pre-due diligence’. Think of this like a dress rehearsal before the real performance.”
Fit is important, enlist the help of a corporate matchmaker:
“Another key reason deals fall apart is due to a lack of alignment in terms of culture between the business and prospective acquirer. So, it’s of vital importance to get a good understanding of how the other party operates prior to getting deep into negotiations, otherwise problems can occur down the line. Sharing the same values and vision really helps in fostering a smooth negotiation process – all it can take at times is a bad feeling for a deal to fall through. This is where it is again invaluable having someone that has been through these processes before, and can source the ideal buyer for your company.”
Momentum is key, avoid hold-ups at all costs:
“I always stress to my clients the importance of being deal ready before heading into any potential transaction. The buyer has shown an interest in your firm at a particular moment in time, but a simple change in external market conditions could lead to them getting cold feet and pulling out. What that means is you need to have done all the necessary preparation before negotiations have started, to ensure the deal gets over the line quickly and smoothly.
“This has never been more important than in the current deals market where the environment can dramatically change over the course of just a few weeks. Another really important thing here is to both sign and close the deal at the same time, as this prevents anything putting the deal in jeopardy in between those two things happening.”
Issues can arise, mitigate this with a dual-track plan:
“Probably the most important bit of advice I can give is to have a dual-track plan in place – this means carrying out a fundraising round while simultaneously looking for M&A opportunities. In this way, if one avenue fails, startups will still be in the later stages of their other option and all is not lost. In what can be an unpredictable market currently, the importance of this approach cannot be understated.”
Have your finances in order and extend the runway, finding a buyer might take time:
“Finally, startups should focus on extending the runway, so to speak – be diligent with the business’s working capital by optimising cash flow, review the contracts you have with your clients and minimise accounts receivable. Applying this mentality to the whole of the organisation is going to be key in the next year, whether you’re entering a fundraising round or considering an exit, ideally startups should be doing both. Applying this mentality also can show potential buyers that you know how to be savvy with capital, which is becoming increasingly important in today’s climate.”
