Due to difficulties in effectively addressing financial distress and operational challenges, the Clinton Cards and Paperchase merger has failed. Further to this, discount home store, Wilko, has announced it will be closing down due to being unable to secure a merger that provided the necessary liquidity to salvage the business. Amidst this recent spate of failed deals, Claire Trachet, M&A expert and CEO of business advisory Trachet, highlights the critical importance of preparing for an exit long before a business reaches ‘the red zone’.

Amidst facing insolvency – having returned back to its owner in December 2019 – Clintons has since closed 156 stores. Whilst the company attempted to combat this by undergoing diligent cost-cutting measures and exploring a merger with Paperchase, this ultimately failed. Likewise, despite previously taking advice from PWC on how to find a buyer, Wilko is shutting down various stores across the UK, having also reportedly struggled in the economic climate, borrowing £40million last year to stay afloat.

Over the past decade, due diligence has found its way to the forefront of investors’ minds, marking a stark shift from what Trachet describes as a “volume culture” amongst big firms after 2008 in terms of deploying funds to acquire and invest in as many companies as possible. According to research from Bain & Company, 60% of executives state that poor due diligence, which did not recognise critical issues, ultimately led to deals failing. Trachet explains that strong growth narratives alone no longer serve as enough to get deals over the line, and instead due dilligence should be viewed as an opportunity with an expert advisor who can help identify and resolve issues.

Claire Trachet, CEO/founder of Trachet, discusses the need for founders to prepare for an exit through 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 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.

“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.

“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 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. 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 deal ready as optionality will increase throughout the following months.

“It is understandable that 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.”