In 2023, M&A activity fell to its lowest level in ten years, as high interest rates and a global economic slowdown dragged down dealmaking. Specifically, total M&A deal flows fell by 18% to about $3 trillion, the lowest amount since 2013, according to Reuters. That slowdown has impacted all sectors, including fintech.
Despite this challenging environment, a meaningful number of deals are still getting done — especially in the fintech space. These transactions have mainly been in the form of strategic investments and acquisitions involving companies struggling with cash flow. We’ve also witnessed a “flight to quality” with resilient companies attracting competitive bidders. But overall, when it comes to fintech M&A, it’s essentially a “wait and see game” as many are sitting on the sidelines in the hopes that market conditions will improve.
Three strategies for navigating the current fintech M&A environment
If you’re readying your fintech company for sale or a capital raise, preparation will be the key to your success. We offer a few key strategies based on what we’ve been witnessing in the current fintech M&A landscape:
1. Obtain a quality of earnings report
We’re seeing that investors are not looking to fund growth; they are instead looking to fund cash flow. A quality of earnings report — which provides an overview of a company’s financial performance, including revenue, expenses and earnings — will help potential buyers or investors be confident that financial metrics are accurate.
Given the instability of current economic conditions, the market wants to see more than audited financial statements. They want an understanding of financials that are as current as possible. That is why the quality of earnings report is so critical — it helps to paint a more current and detailed picture of your organization’s financial health.
2. Be prepared for early due diligence
It’s a new world when it comes to due diligence. Recently, the trend has been for this stage to take place even before the Indication of Interest (IOI) phase of the deal. This is a noticeable shift in the M&A process, with buyers starting diligence much earlier in the deal lifecycle. What this means for sellers is that you’ll need to have accurate and reliable key financial reporting metrics much sooner. This is most likely happening because buyers are more cautious in the current market environment and/or because they may want to slow the buying process as they wait out turbulent market conditions.
3. Expect more in-depth and prolonged due diligence
Overall, there’s intense scrutiny regarding cash flow. Buyers are more skeptical of financial results and people are going further into due diligence than they used to. This is having a direct impact on deal timing — it’s taking much longer to close. Sellers should be prepared for increased scrutiny and a more intense and extended due diligence process.
How BPM can help you navigate the current fintech M&A environment
Although M&A volumes are down, deals are still getting done in the fintech space. It’s just that the fintech M&A process has become more burdensome with the challenging economic climate, contributing to an overall feeling of caution from both buyers and sellers.
Our team is on the ground, helping our clients navigate these hurdles every day. Along the way, we’ve built a strong understanding of what’s needed to get ready to go to market and can advise your company on the best practices we’re seeing in the current fintech deal landscape. Likewise, we’re also specialists with due diligence and can help guide your team through that process whether you are a buyer or seller.
With interest rates expected to begin stabilizing in the year ahead, we anticipate that M&A activity will pick up in 2024, especially true for fintechs. If you’ve been sitting on the sidelines waiting for the fintech M&A market to improve, that wait could be ending soon. Let us help you prepare today for an upcoming transaction that could help chart your course for the future.
To help with your evolution at every stage of the growth lifecycle, we’ve developed BPM’s Business Lifecyle Center to help guide our clients through any stage and economic backdrop. Our services focus on remaining organizationally proactive to help leadership avoid falling into the trap of stagnation. We invite you to explore our Business Lifecycle Center and see how we can support your organization’s journey.
With over 13 years in public accounting, James has provided accounting and audit experience to both public and private companies. James focuses on technology, including SaaS and FinTech companies, as well as financial service firms, including peer-to-peer, online and alternative lending. He specializes in complex equity transactions, business combinations and revenue recognition. James enjoys working with his clients on each engagement to align himself as more of a partner than just an auditor.
James Lichau holds an active CPA license in California.
Craig leads BPM's Transaction Advisory Group and has more than 15 years of experience with a focus in assurance and financial due diligence services. Craig has served start-up companies to Fortune 500 companies in the Venture Capital, Service and Technology industries.
He has extensive experience with Venture Capital funds as well as advising privately held middle market companies throughout their business life cycle regarding technical assurance and accounting issues, merger and acquisition advisory services, organizational and operational restructuring, assessment of financial risk and professional assistance with integrations.