When buying companies, the deal doesn’t end the day it closes. Rather, that’s when the hard work of achieving an ROI begins. Because of that, it's good to have a CFO who understands more sophisticated financial reporting.
For TalentLaunch Chief Corporate Development Officer Matt Lyon, speaking at last year's Cleveland Smart Business Dealmakers Conference, he says having CFOs who have already had audits is something he encourages many of the brokers and others he works with to find in the potential targets they pass along.
"What that tells me is there's a discipline around their financial reporting system," Lyon says. "They understand the investment necessary. They've got the confidence and quality of people to produce something like that."
When that's not the case, he has to spend time focusing on financial education with the next level of leadership that remains with the acquired company.
"Sometimes the owners only give them bits and pieces of information and now you're assuming they're going to run the whole operation, and you assume that they know how to read a P&L and the financial statement, and know some of the leverage things," he says. "And I found that often to be just not the case at all. They might know sales and cost of sales, maybe, and then you spend a lot of time educating them to that."
Because Resilience Capital Partners Co-CEO Bassem Mansour is typically buying with the idea of selling within a defined time period, he doesn't necessarily have the luxury of the longer-term outlook that a strategic owner or a family-owned business would have. So, for him, it's about driving shareholder value over a short period of time, which is often a different approach for the CFOs in the companies he's buying.
"A lot of the businesses we've acquired over time were family-owned businesses where they are much more focused on short-term, year-to-year cash flow," Mansour says. "In many cases they were businesses that supported a lifestyle for an ownership group that's a family ownership group. Where for us, it's less about interim cash flow and more about maximizing the value at the exit, building shareholder value. So, it impacts the decision making for the CFO and how they operate the business day to day."
His firm is often the first institutional capital that's been involved with the businesses in which they invest. That's why it's beneficial to work with a CFO who understands those circumstances, and is able to focus on not only operating the business today, but always preparing for an exit or a liquidity event that could happen within three to seven years.
Transitions into new ownership can be difficult for CFOs because there are a lot of new things coming at them. It means new financial reporting requirements that they're not accustomed to and the addition of senior or subordinate debt for the first time — having that institutional capital and the reporting requirements that come with it.
"We have a set of reporting requirements that we have with our institutional investors. We task the companies with doing the same," Mansour says. "So, there's a lot of new ground for CFOs to cover. In many cases it could be an audit where they haven't had an audit in the past. So, trying to put resources during the transition period around the CFO is critically important during the onboarding so that they can get comfortable with tackling each of these areas in a step fashion as opposed to hitting them all at once in the first 90 or 180 days."