The UK FinTech sector is experiencing a significant uptick in the M&A activity, especially in infrastructure, payments and B2B SaaS platforms. Acquirers are on an active hunt for innovative companies in the FinTech space that can strengthen their technology capabilities and market position.
Many founders are entering acquisition discussions earlier than anticipated and often before being fully prepared. Whilst strong financial performance creates opportunities, legal and structural readiness can directly influence three critical outcomes: valuation, deal certainty and transaction speed.
For FinTech founders contemplating an exit, early preparations represent a competitive advantage. This article outlines four essential areas where proactive legal housekeeping can transform founders' M&A readiness: cap table clarity, option schemes and exit terms, IP ownership and technology proof, and contract readiness.
Cap table clarity
FinTech lifecycle typically includes multiple funding rounds: from angel and seed investments through to Series A, Series B and beyond. FinTech capitalisation ("cap") tables can often be complicated as each fundraising round adds a layer of sophistication; creating a complex mix of share classes, preference rights, anti-dilution provisions, and investor consent requirements.
Buyers will demand a clean and comprehensive cap table, ideally maintained through a digitised structure. Any ambiguity or inconsistency between the company's statutory register, shareholders agreements, company's articles and cap table may give rise to red flags during the due diligence process. Discovering these issues too late during the sale process can threaten timetables, so it is best to resolve any ambiguities before the due diligence begins.
Option schemes and exit terms
Enterprise Management Incentive ("EMI") schemes are commonplace in FinTech companies as they offer attractive tax advantages under qualifying conditions. However, they frequently create confusion at exit, particularly around vesting acceleration, exercise mechanics, and tax treatment.
Buyers will interrogate whether EMI options were properly granted within HMRC's valuation requirements, whether the company maintained its qualifying status throughout (so that tax advantages can be realised) and how the scheme operates upon acquisition. Sellers should understand the fundamentals of how their EMI scheme operates; for example, whether EMI options would accelerate on a change of control, what percentage of employees hold vested but unexercised options and how any cash-out obligations operate; buyers will want to know these details.
A poorly documented option scheme can lead to transaction friction. A detailed waterfall analysis (including exercised and unexercised options) will help clarify the operation of the scheme as well as demonstrate transaction readiness and professionalism.
IP ownership and technology proof
For FinTechs, technology is the core asset, so it follows that outright ownership of the intellectual property ("IP") behind the technology is key. If founders, contractors or third party developers helped produce key business technology, ensure that ownership has been formally assigned to the company.
Buyers will also examine the company's technology dependencies and data handling practices. FinTechs typically rely on critical third-party integrations, such as open banking APIs, KYC and AML compliance tools, payment gateways and cloud infrastructures. Buyers need assurance that these relationships are secure, properly licensed and will not create any post-acquisition operational risks.
Conducting a comprehensive IP audit covering the company's technology stack (including all third-party dependencies, licensing agreements and integration points) will enable sellers to demonstrate to buyers a clean ownership and assignment position in relation to all IP required for the operation of the business.
Contract readiness
Many FinTechs have large clients on their books, often including regulated entities such as banks or insurers. Sellers need to be mindful of whether any contractual arrangements with their clients, customers or suppliers include change-of-control or consent clauses that require prior written consent from the counterparty to the proposed sale. These clauses can create significant transaction risk, as buyers need comfort that no major clients, customers or suppliers can terminate or renegotiate their contractual arrangements with the company due to the acquisition. It is important to identify and flag these risks early to avoid surprises during the deal process. Proactive conversations with key counterparties can be useful at the appropriate time during a transaction.
Takeaway
Successful FinTech exits depend on more than strong financials. Whilst innovative technology and strong growth metrics attract initial interest, deals will ultimately succeed or fail based on how well prepared the company is for sale. Sellers who invest in good transaction preparation early position themselves for materially better outcomes and higher valuations, and having strong advisers on your side is important to achieve this. Mishcon de Reya’s corporate team understands the nuances of the FinTech sector and can help you navigate the process efficiently.
If you are building towards an exit, it may be your time to address these fundamentals.