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Four ways a CFO can add value in M&A

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The CFO brings a critical perspective to the sale of a business.  Typically she’s the one with the best understanding of the “numbers”, the financial history and the overall economics of the business.  Most CFOs have got their monthly reporting process down and know how to work efficiently with lenders and auditors.  There’s a regularity to many aspects of the CFO job.  Shifting from the routine reporting and compliance functions to the whirlwind of an M&A process can be jarring and the unprepared CFO can find herself overwhelmed with M&A requests and decision-support layered onto the day-to-day responsibilities of the job.

Here are four ways a CFO can approach adding value to an M&A in process, and get ahead of the work.

  1. Prep.    Take a look at the monthly reporting packages beyond the high-level financials.  Perhaps your board has mostly been interested in revenue and profitability, but not so much on customer churn or increasing support costs.  Work with your senior team to track a few key performance indicators and save that data every month.  Track snapshots of the sales pipeline and have someone map out conversion rates  (if your CRM isn’t doing this for you!).  Track unusual expenses, one-time costs which are really long-term investments (open a new facility?) along with supporting documents.  If revenue, gross margin or EBITDA changes dramatically from one period to the next, summarize why.  Perhaps find out what can be done about it!  Track variances to budgets and document where things went well and not so well. Look at your forecast and think through a bridge from the last 12 months of results to the next twelve months. Flag anything that looks risky and talk with the responsible business person.  Do an “80/20” style analysis on your customer data.  Are there customers that just cost too much to keep? Are there customers where you’re getting a low but increasing wallet share? If you’ve got a lot of customers, can you put them into logical groups?  Is there a lot of variance within a group? Track recurring revenue metrics.
  2. Organize.  This is about pulling together a dataroom.  Get together excel spreadsheets with your monthly results all in one place.  Add up your addbacks and adjustments.  Pull together the basic diligence materials — contracts, employee information, IT summaries, tax filings — that your investment banker and eventual acquirer will want to see. Work efficiently with your diligence partners.
  3. Substantiate.   Every acquirer is buying the future, and every seller has a story about the future.  The best CFOs add data to that story.  Growing by adding salespeople?  The CFO can demonstrate how sales hires in recent years have performed.  Growing with new products?  The CFO can show how margins performed for the last 4 product launches. You’re not going to find any of this interesting data in most company financial reports.  It’s the CFO who must pull together the data behind the story.
  4. Integrate.  Part of this relates to pre-transaction work, but it’s easier to think of it as integration.  Can you present your financials in a way the buyer will understand?  Can they map “your way” to “their way” easily or is there a significant difference in, for example, how you both report revenue? Many private companies don’t have processes analogous to public company reporting and a public company acquirer is going to need to get things to their standards quickly. The CFO can help with this transition and, by virtue of the smooth process she’s run through diligence, give the buyer confidence that the post-closing integration will be smooth.

While there’s structure and timelines for each M&A process, there are always unexpected items that pop up.  Unanticipated diligence requests, financial performance that somehow doesn’t align with the budget, changes to vendor costs (e.g. shipping costs).  A good CFO is part of the team deciding how to respond to these.  Her understanding of the underlying economics of the business, the customer trends and data, the historical vendor costs, brings financial clarity to business questions.


Alan Fullerton is a partner with Mirus Capital Advisors. He works with owners of middle market businesses and can be reached at fullerton@merger.com.