The fintech industry has experienced explosive growth in recent years. From 2021 to 2024, global fintech revenues surged at a 27.5% compound annual growth rate, expanding from $50.1 billion to $103.8 billion. In 2024 alone, the sector has already attracted $113.7 billion in funding across 4,547 deals.1
Looking ahead, the future appears bright for fintech. The market is projected to reach a staggering $1.5 trillion by 2030. In the near term, fintech revenues are expected to grow at triple the rate of the traditional banking industry through 2028.2
Financial Advisory Services for FINTECH Companies
Financial advisory firms can provide the following services to fintech companies.
- Preparation of projected income statements, cash flows and balance sheets
- Scenario and stress testing liquidity and solvency analyses
- Quality of Earnings ("QOE") studies for companies courting buyers
- Fairness opinions for mergers and acquisitions
- Valuations of intellectual property ("IP") and employee stock options
Projected Financial Statements
A financial advisory firm can develop due diligence based projections significantly enhancing credibility for investors by creating a concise presentation with supporting metrics, graphs, and visuals, including:
- C–level executives' backgrounds and experience
- Strong and protected company IP
- Product/services' competitive strengths
- Relevant supports for revenue growth and margins
- Demographic trends
- Economic factors
- The company's projected market share capture
Quality of Earnings ("QOE") – Historical Accounting Profits v. Going Forward Cash Flows
In the M&A space, the QOE report helps the buyer and seller understand key company operating metrics, such as QOE ratios, revenues, gross margins, cash flow, adjusted EBITDA, and working capital. It bridges the knowledge gap making both buyer and seller comfortable completing the transaction.
QOE analyses dive deeper than financial statements and include:
- QE Ratio: Net Cash Flow from Operations ÷ Net Income
Quantify quality income and compare to non-cash accounting profits arising from policy changes, foreign exchange fluctuations, allowance and reserve estimate changes, and depreciation estimates
Ratio > 1: higher quality earnings; ratio < 1: lower quality earnings
- Additional Key Ratios: quick ratio; accounts payable days outstanding; sustainable profit margin; employee turnover
- Revenue patterns and growth, such as anomalies, seasonality, customer concentration, and product concentration
- Expense Adjustments: 1) additional recurring costs post-transaction; and 2) expenses not required post-transaction, such as duplicate overhead for consolidated operations or above-market salaries
- Future working capital requirements, reserves, and liability recognition
- Identify and analyze potential indebtedness not on the balance sheet which may reduce purchase price, e.g., fixed asset purchase commitments, litigation matters, and income and sales audits
Fairness Opinions – Testing Deal Terms
A company's board of directors are subject to the business judgment rule. In M&A, this means the board must either: (1) possess the knowledge and experience to ascertain whether the proposed transaction is financially fair, or (2) lacking such knowledge and experience (most always the case), rely on an outside independent financial advisor to make this determination in the form of a fairness opinion letter and supporting pitch deck. These advisors conduct due diligence, including:
- Extensive interviews with target company's executives
- Independent research on target company's operations
- Detailed financial analyses of target's historical and projected financial statements
- Scenario and stress tests on target's projected financial statements
- Reviewing all drafts of the purchase agreement
- Industry, economic, and competition analyses
- Valuation analyses of target usually employing accepted methods
If deemed fair, the advisor issues a fairness opinion letter and pitch deck to the board, presenting findings and answering questions about the process and transaction.
Valuations of IP and Stock Options – Key Assets and Employee Incentives
If a company possesses key know-how, technology and/or patents, it may consider additional monetization through a valuation of IP which can be presented to existing and potential investors as support in raising further investment.
Another monetization consideration is licensing IP to other companies. Valuation professionals can determine the royalty rates the IP would fetch in open markets.
For start-up and emerging growth companies which need to carefully conserve cash balances, granting employees stock options is a non-monetary method of building a strong culture and incentivizing the team. For financial and tax reporting purposes, these options must be valued by an independent valuation firm.
Footnotes
1. KPMG. Pulse of Fintech H2'23. February 2024.
2. McKinsey & Company. What is fintech? January 16, 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
