For many business owners, the sale of their company represents the culmination of decades of work and is likely be the single largest, most important transaction of their lifetime. With so much money at stake, it is important that the highest price is secured, and that the sale is executed flawlessly.
Much of the responsibility for success or failure of these transactions rest on the shoulders of the CFO. For the business owners relying on them, understanding the role of the CFO through all phases of the process is essential to having the right person on the team- whether that be a full-time employee or a suitably qualified consulting CFO. Below, we explore essential elements of a successful deal and the role of the CFO in each of them.
Transaction Readiness: Grooming the Company for Sale
Long before the trigger is pulled to initiate the formal sale process, the company must be made ready for sale. Early in my career I was fortunate to work for someone who was the quintessential entrepreneur and a wonderful mentor to his young CFO. Errol taught me that “good luck” happens when “preparedness meets opportunity.” As we grew the company from $3.5m to $105m in revenue in less than four years, we were prepared to take advantage of every opportunity that came our way.
Errol also taught me that “failing to prepare is preparing to fail.” We thoroughly prepared for each of the many acquisitions that we made and took advantage, with Machiavellian ruthlessness, of the lack of preparation on the part of our “opponents” in each deal. We would use negative information that came to light in due diligence as an opportunity to re-trade the deal on terms much more favorable to us.
To ascertain a company’s readiness for sale, a “Transaction Readiness Assessment” (TRA) should be conducted. This involves a systematic and brutally honest examination of every area of the business through the lens of a potential buyer. In summary, the CFO must ensure that the company has complete and accurate financial records. This will include audited (or auditable) annual financial statements prepared in accordance with GAAP (Generally Accepted Accounting Principles) and interim statements prepared on a timely monthly close cycle. The TRA report will assess the company’s readiness across multiple areas (legal, finance, HR, IP, etc.) and list defects to be remedied. This should then kick off a formal remediation project to remedy them.
Transaction Timing: Understanding the Season
All markets are cyclical. An astute CFO will be broadly aware of the macro-economic environment, including trends in M&A (mergers and acquisitions) activity and valuation benchmarks of both private and public companies – especially those whose business is comparable to the company they are serving. The CFO will be paying particularly close attention to M&A transactions in the company’s industry and will be aware of who is on the acquisition trail, the valuation metrics, and the strategic rationale that is driving deals.
Transaction Team: Experience is Essential
A team of rookies playing out of position is not going to win many ball games. Assembling a seasoned and competent deal team, including a CFO with M&A experience, is vital to a successful sale transaction. The CFO will also assist in the selection of the other members of the deal team including legal, tax, audit and, most importantly, the right investment bank. If the company’s incumbent CFO is not experienced in M&A, it is advisable to include a second CFO with M&A experience on the deal team to guide the overall process and mentor the inexperienced CFO in the art of the deal.
Transaction Marketing: Target Identification / Deal Collateral
There is an old adage in real estate that “one buyer is no buyer.” The highest price will be obtained for the business when it is marketed through an experienced investment bank to a select group of qualified potential acquirers via a process that generates serious interest from multiple parties. The goal is to set up a competitive auction for the business.
Understanding the strategic rationale of potential buyers will help illuminate the true value of the business to them, which may far exceed the value calculated by using industry benchmarks. The seller’s CFO should try to think like a buyer CFO in terms of strategy, synergy (revenue attach, redundant overheads, acqui-hire, etc.) and integration to estimate the strategic value of the business for a range of potential buyers.
Understanding the strategic motivations of potential buyers will guide the production of the marketing collateral for the deal. This will comprise a non-confidential teaser, an executive summary, 3- to 5-year financial projections, a confidential information memorandum, and/or a pitch deck. The CFO should work closely with the seller’s investment bank to ensure these documents accentuate the strategic appeal of the business.
Transaction Execution: Due Diligence / Deal Points
Sellers often focus disproportionately on the price that they are being offered for their business. This can be a big mistake as other terms and conditions in the agreement may create liability, risk, and potentially reduce the eventual proceeds of sale. The price clause of the sale and purchase agreement often comprises one or two paragraphs in an agreement that might run 40 to 70 pages and include several hundred pages of attached exhibits. It is the CFO’s job to understand the nuance and potential implications of all the respective clauses, calculate risk and reward, and optimize the deal terms accordingly.
The CFO is often the conduit through which due diligence information flows to the deal room. He or she should work with the rest of the deal team (especially the investment bank) to carefully review and approve all docs before they are uploaded.
Post Transaction Integration: Day One and the Next Hundred Days
As the due diligence process nears completion and closing is set, the CFO should work with the buyer’s CFO to develop a comprehensive integration plan. This plan should include feedback loops and measurement criteria to create accountability, as well as answer questions such as “how quickly can we integrate the back-office functions?” and “what is the target for deal synergies and how quickly can we capture them?” A wise person once very astutely answered these questions by replying “as fast as we can and no faster.” Going too fast introduces the risk of disruption to the business and damage to the culture, whereas moving too slow can dissipate the benefits of the deal.
The Bottom Line
It is important to remember that the preceding points we’ve covered barely scratch the surface of the CFO’s critical role in successfully consummating the sale of a business. The bottom line is that having a suitably experienced individual, whether that is a full-time employee or a consulting CFO, as part of the deal team is essential.
Have questions about the sale process or need an experienced CFO to support you through a successful sale of your business? Request a free consultation today from a vcfo expert who can help.