Change and growth are part of life, especially for anyone running a small to medium-sized business. For many, exit planning implies a sale to private equity (PE) or an acquisition by an industry strategic, but in reality, businesses undergo multiple transitions from one stage of operation to another. Whether your business is transitioning from a pre-revenue stage, shifting from a growth to profit focus, initiating a fundraising round, or putting the company up for sale, a great CFO, whether full-time or fractional, will always have your company prepared.
A CFO’s Exit Planning Role
Putting your company up for sale is a complex process with many moving parts. While the goal of the executive team is to maximize a company’s value, the CFO has the critical role of making a fact-based case to buyers and investors that your company will be a great addition for them.
A good CFO needs to keep the company finances in order at all times, but when it comes to the sale of your company, an excellent CFO will also serve as a:
Metric Analyst
Data Translator
Operations Expert
Financial Strategist & Predictor
Diligence Watchdog
Empathetic Leader
While not immediately obvious, each of these roles is critical to the exit planning process, and it takes an experienced CFO with a diverse skill set to be proficient in each.
Your CFO as a Metric Analyst
When it comes time for a sale or fundraising, investors are always going to make an initial assessment of valuation based on the financial statements. They will likely use multiples on current or future Revenue and/or EBITDA; they might perform a discounted cash flow analysis; they could focus on market size or sales potential if pre-revenue, or any combination of metrics available to them. A 2015 Deloitte survey asked: “In which ways can a successful CFO positively impact EBITDA?” 71% of private equity respondents selected “high quality management to enable decision making” which is higher than any other category surveyed. The CFO’s strong management of information and KPIs (Key Performance Indicators) could positively impact the EBITDA multiple that they would pay for a company.
Your CFO as a Data Translator
The CEO and executive team require accurate information to make decisions and set a vision. The CFO needs to develop and clearly present the critical metrics in order for an external investor to have the confidence to buy into your company’s value proposition. The presentation may include high-level or functional-level dashboards, financial metrics, or a pitch book with as much detail as an investor needs. Every business goes through difficult periods, but if your CFO can explain why the company missed an internal target, how the company got back on track, and what procedures mitigate exposure to the same or similar events in the future, it will build, rather than deteriorate confidence in the fundraising process.
“Every business goes through difficult periods, but if your CFO can explain why the company missed an internal target, how the company got back on track, and what procedures mitigate exposure to the same or similar events in the future, it will build, rather than deteriorate confidence in the fundraising process.”
Your CFO as an Operations Expert
A company’s founder, CEO and COO have a direct impact on a company’s vision, operation, and strategic decisions, but the CFO’s data and analysis informs those actions. The same Deloitte survey referenced earlier found that 79% of PE investors and 90% of CEOs stated that CFOs enabled decision making that positively impacted profitability. As a metric analyst and translator, it is easy to see why a good CEO is perfectly poised to help the executive team or an investor understand where the company is outperforming competitors while identifying areas for improvement. This assistance could take the form of assessing net present value calculations on investment alternatives, monitoring inventory levels, or proposing cross-functional operational spending levels.
“79% of PE investors and 90% of CEOs stated that CFOs enabled decision making that positively impacted profitability.”
Your CFO as a Financial Strategist & Predictor
A truly attractive acquisition candidate will stand out by having a believable and supportable forecast demonstrating significant future growth. A CFO’s ability to present and defend those projections creates that additional premium. It can be the difference between a 5x revenue multiple or a 10x. In fact, 55% of PE and CEOs stated that a CFO’s ability to provide evidence that supports a company’s growth narrative was one of the top three most important factors influencing the premium paid during an acquisition. Your CFO should be able to build out projections utilizing a 3-year financial model with sales, earnings, and cash flow targets. They should provide a range of targets with a nominal base case, up to stretch goals, down to mild underperformance, and even contingency goals preparing for unexpected, external events. Perhaps most importantly, your CFO should be able to explain the data and assumptions that went into the company’s financial forecasts, while fielding questions and setting an investor’s mind at ease.
“55% of PE and CEOs stated that a CFO’s ability to provide evidence that supports a company’s growth narrative was one of the top three most important factors influencing the premium paid during an acquisition.”
Your CFO as a Diligence Watchdog
PEs, VCs, even Angel investors are going to take the diligence process seriously as they look to uncover cracks in your company’s history and financial projections. Continuous diligence means your CFO understands financial variances during the normal course of business and will always be prepared to explain aberrations in the company financials. By consistently monitoring KPIs, not only will your company avoid pitfalls and capitalize on opportunities, but prospective investors will be well informed from the start, leaving fewer surprise discoveries during their own diligence process. Accurate projections are equally important as investors will want to ensure the projections at the start of a deal process are either met or exceeded before closing. There’s a fine line between achievable projections and an underestimate resulting in a lower valuation. However, a CFO can assist in negotiations that establish a reasonable baseline, with additional benefit if the company can achieve its stretch goals.
Your CFO as an Empathetic Leader
Even the most skilled CFO cannot put together accurate financial statements without reliable information from a trusted team. Data reporting can be automated at some level, but the subjectivity of projections and growth plans requires input from the front line. As an empathetic leader, the CFO can instill cost reporting discipline and act as a guiding hand for managers to track their metrics according to best practices. Bad news is never pleasant, but it doesn’t get better with age and is even worse when it comes to light during diligence. It’s important to emphasize transparency and build trust, encouraging leaders to come forward with accurate data.
Avoiding Deal Killers
Exits are complicated, emotional, and fraught with transaction ending pitfalls around every corner; fortunately, many are avoidable with the right planning.
Here are a few deal destroyers that an experienced CFO can help you avoid.
Inaccurate Financial Projections
If you set projections that are too aggressive, and the company fails to meet them, your buyer will quickly lose confidence, ask for concessions, or call the deal off entirely. Set your forecasts too low, and you will sell the company you worked so hard to build for less than it is worth. Developing accurate financial projections may seem like it requires the balance of a high-wire act, but your CFO should be making financial projections for years before they ever appear in front of a buyer. The rest of your management team needs this data to make strategic decisions, so the CFO should have a solid understanding of business operations and industry dynamics.
Furthermore, your CFO can institute a sound financial reporting structure with automated systems in place and a culture of transparent, upward reporting. CFOs also add value by making a numerical case that your company could be worth more as part of the buyers organization. There may be shared accounting or branding synergies, especially if the buyer is considering a roll-up merger to form a more complete product offering or end-to-end service.
Time, Delays, and Lack of Preparedness
“Time kills all deals.” External events, failure to meet forecasts and even deal fatigue can cause transactions to fall apart. In reality, a company has a very short window of opportunity to assemble bidders, make its value known, build trust, and close for the highest price/best terms possible. Failed sale or investment processes could result in year+ delays or a down round to the chagrin of existing stakeholders.
Because an involved CFO has their finger on the financial pulse of your company, they’ll be able to provide quick turn-around time when it comes to:
Show audit-ready data and financial analysis
Populate, or pre-populate, the data room
Share cash-flow, sales, and profit forecasts
Field questions, explain assumptions, or generate alternate forecasts
Weed out unqualified buyers or bad fits
When a prospective buyer asks for access to your data room, there’s a huge difference between: “here’s where you can find financial metrics for the last 5 years that we continuously update as part of our standard operations”, and “we’ll get back to you on that.”
Diligence Surprises
A Forbes article found that 50% of all sales processes fall apart during formal due diligence. If the buyer discovers a material issue that the seller fails to disclose, its effect is magnified, and the fragile trust that has been forming is instantly shattered. Lawsuits need to be revealed, discrimination accusations explained, and where the CFO is concerned, financial statement inconsistencies and projections need to be explained.
There have been some high profile M&A failures and in all but the hottest seller’s markets, a potential buyer would much rather kill a deal than take the blame for closing a bad one. For example, when Bank of America purchased mortgage provider Countrywide in 2008, BoA spent $2 billion, and acquired little more than ~$50 billion in bad debt. As the seller, this might sound ideal, but even when an aggressive buyer rushes through their diligence, lawsuits for fraud against the seller could prove disastrous. Continuous diligence by the CFO helps ensure your company will head off any financial anomalies early in a deal. Investors should not discover anything new during diligence, because everything should already be revealed and discussed on your terms.
“Continuous diligence by the CFO helps ensure your company will head off any financial anomalies early in a deal.”
Good Exit Planning is Great Business Operation
Tracking metrics, maintaining a rolling 3-year financial forecast, and continuous diligence requires a lot of work. Fortunately, these exit planning necessities provide extraordinary value to daily business operations. While not exhaustive, the table below highlights how many components of a CFO’s job simultaneously contribute to a healthy, stable business, while maximizing the exit sales price.
When you’re trying to run a business, exit planning might feel like an easy action item to push to the bottom of your priority list. However, many of the steps a CFO would take to prepare for a sale directly benefit business operations saving a lot of time and money along the way.
Fractional Vs. Full-time CFO for Exit Planning
The best exit planning begins the day you start your business, but that doesn’t always feel practical. We know a CFO plays a valuable role before and during an acquisition, but for many entrepreneurs, employing a full-time CFO from day 1 is impractical from a cost perspective. Some entrepreneurs add the CFO role to their list of responsibilities, but by the time they consider an exit, their financial records and projections are in a state most potential buyers would find unacceptable. A junior accountant may be more affordable and can help with bookkeeping, but when it comes to projections and strategy, a buyer has potential to poke some holes in your plan and quickly lose confidence.
For many, a Fractional CFO can be an affordable alternative that not only brings the diverse skill set and depth of analysis of a full-time CFO, but can also be present at an early stage providing valuable financial data and projections from start to finish. Not only is this an asset during exit planning, a good Fractional CFO will help you run your business, make more informed decisions based on data, and help develop contingency plans to prepare for an unexpected change in circumstances.
“A Fractional CFO can be an affordable alternative that not only brings the diverse skill set and depth of analysis of a full-time CFO, but can also be present at an early stage providing valuable financial data and projections from start to finish.”
Flexibility is key in business, especially at the small to medium size, and a fractional CFO can offer you flexibility both in hours and scope of work. A Fractional CFO can tailor a customized solution to your business and guide you to the next step.
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About the Authors:
Dan DeGolier is the founder of Ascent CFO Solutions and a Fractional CFO with nearly 30 years of experience. He is passionate about working alongside leaders of companies to help them “upward” to their highest potential. Andrew Dudar is a registered investment advisor representative whose background and career in engineering allows him to conduct financial analysis by breaking down complicated subjects and making them easier to understand.