2023 saw a record year for M&As for all the wrong reasons. M&A deals made with UK involvement fell to a 14-year low in 2023 to a total value of £144.7bn. This is down from last year by 45%, the lowest year-to-date total since 2009 amid the turmoil of the global financial crisis. M&As involving a UK target have also only reached around £77bn so far this year, which is just over half the value recorded during the same period in 2022. This follows a 48% decline in domestic M&A alongside a 49% drop in inbound deals. Yet with start-ups across Europe seeing their values plummet: the average late-stage start-up was worth 77% less in Q1 this year than in Q1 2022, the idea of M&A is now seen as the safer way to exit rather than an IPO, which has become increasingly unattractive in the UK given the uncertain market volatility and poor sentiment towards the sector.
However, Claire Trachet – CEO and Founder of business advisory, Trachet asserts that exit opportunities will increase towards the end of the year and has provided her expert advice to ensure that start-ups which get the opportunity are able to do so smoothly and at the value they deserve:
1. Enlist the help of an advisor as a rule of thumb
“The majority of deals fall through at the due diligence phase. Most commonly, this is because start-ups 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 add value to a deal during the due diligence process, rather than have it slashed or thrown out entirely. The simple message here is to 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.”
2. Always be deal-ready
“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.”
3. The finances
“Keeping the businesses’ financial statements in order is crucial, buyers will be looking at the company’s Income statements, cash flow, statement of changes in equity and balance sheets in granular detail – mainly looking to highlight your liabilities, current or contingent. Numbers can paint a powerful picture, it is the seller’s responsibility to highlight past successes and future opportunities through these documents, this will help strengthen the company’s position throughout the information exchange as you showcase the company’s potential.”
4. Be proactive
“M&As tend to involve a significant amount of due diligence by the buyer, however, a seller can significantly improve their position and negotiating power by facilitating this process. Being transparent about the obligations the buyer is assuming, the nature and extent of the company’s risks and liabilities, contracts, legal situations and IP concerns builds trust and will ultimately help the deal come through. Buyers go through with deals on companies they know and trust.”
5. Ensure your buyer is the right fit for you, don’t make yourself a right fit for the buyer – avoid wasting resources on an M&A which will eventually fail
“There absolutely should be clear 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 before getting deep into negotiations, otherwise, problems can occur down the line. Sharing the same values and vision 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.”
6. Due diligence is the pitch, after the pitch
“A seller shouldn’t only be concerned with demonstrating the likely future performance of their business as a stand-alone. Buyers usually want to understand the extent to which the seller will fit culturally and strategically within the larger organisation. By highlighting products, services or technology the buyer doesn’t have or might need, the due diligence process can be an opportunity to further the organisation’s value proposition.”
Claire Trachet, CEO/founder of Trachet, discusses the need for founders to prepare for an exit with thorough due diligence before their business hits the red zone:
“Amidst the current climate, it’s crucial for founders to view an exit as an option, and long before their business hits the red zone. By anticipating this well in advance, founders can safeguard their business’ future and negotiate from a position of strength during potential exit discussions.
“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 preparations 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 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.
“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, start-ups 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.
“Finally, there should be a 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, start-ups 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. This is key as there is now a growing number of investors who are sat on a dry powder pile having deterred investments in H1. This means there are significant opportunities on the horizon, and now is the moment to prepare and get the deal ready as optionality will increase throughout the following months.
“Understandably, founders are emotionally attached to their businesses, however, the next 6-12 months will be a key period for founders to examine whether an M&A deal is the best outcome to carry forward their organisational growth. There needs to be a look at what the priorities of the company are, and then a conversation between the board and investors about this. If you can see the end of the runway, then you shouldn’t be shy to let go. An M&A should not be seen as the end, but rather the beginning of a new chapter with someone bigger, more resources, and someone who will better support and serve the business.”
