Executives looking to sell their companies in today’s anemic mergers and acquisitions market face new challenges as the bar rises for what constitutes a good deal. As transaction volumes have plunged this year, buyers have become more discerning about the purchases they are making.
While CFOs aren’t always in the driver’s seat — that spot is typically reserved for CEOs — the first serious look that most companies will give a target is squarely in the finance chief’s wheelhouse: the books. And there are steps financial executives can take to make themselves more attractive to prospective buyers, consultants who work with companies in the field say.
One of the keys to winning a good offer, stressed repeatedly by experts, is keeping good financial data. This means information must be accurate, up to date, and easy to understand, they said.
“If the bookkeeping is not done properly, [a buyer doesn’t] really know what the business is doing, what they’re not telling,” Shannon Weinstein, a CFO advisor who leads Killingworth, Connecticut-based firm Fitnancial Solutions, said, noting that anyone interested in buying a company wants to know just what it is they’re buying, and if they can’t understand the financial information, they’ll simply move on. Messy bookkeeping is a red flag to be avoided.
In today's economy people are much more careful, eager to kick the tires and look at the engine before driving off the lot, according to W. Michael Hsu, who leads Irvine, California-based CFO consulting firm DeepSky.
“You need to have clarity on your financial picture. Exactly what is my position? What is my cash burn? If I’m pre-revenue, how long am I going to burn this and what is it for and do I have a budget plan? I think now, more than ever, the demonstration of some financial literacy will help you,” he said.
Elliot Findlay, national managing principal of M&A at Grant Thornton, said from his Chicago office that the CFO is pivotal in this role, as they are the keepers of all the data that is used to get the deal done. This isn’t just to inform potential buyers, though – the quality of financial data can also demonstrate the quality of the company’s financial operations, which can send a powerful signal to potential buyers, both for good and for ill.
“Everyone will always tell you, ‘you’ll be surprised by how organized we are.’ And then we go in and it’s usually a [mess]. The people get more adamant that they’re super organized, but when you get under the cover you see this looks like a dog’s dinner,” he said.
Arming the CEO
It is typically the CEO who is meeting with prospective buyers but Fitnancial's Weinstein said it is imperative that the CFO equip the CEO with the right financial data as well as the ability to communicate its wider context. Even better is if the CFO has already been doing this before a sale was even considered.
“Proactively, the CFO needs concrete goal discussions with the CEO or founder … You want a game plan in place where you walk through the scenarios of how the daily decisions will impact the ability to sell in the future, so incorporating that in routine conversations with the owner to ensure they understand the impact and aren’t blindsided when they sell,” she said.
Good data, though, can only go so far. DeepSky’s Hsu said it’s important to maintain a realistic picture of the current environment, particularly when it comes to a company’s value. He said he’s seen too many people thinking it’s still a seller’s market, an attitude that will not play well with today’s buyers. He noted that buyers now are looking for deals and aren’t willing to pay as much as they did before.
“A year, two years ago, you could have had a company and you could [easily] get money for that company. But now, a lot of founders are going ‘hey, my company was worth whatever a year ago, two years ago’ and not coming into reality. This is not the price, your company is not worth that much anymore,” he said.
Leaning on comparative performance
Grant Thornton’s Findlay raised a similar point. He talked in terms of “caviar and breakfast cereal” cycles where, depending on where the economy is, one will just be more popular than the other.
“So, to come back to the question of ‘what can a company do to be more attractive,’ in some instances it’s nothing,” he said. You can’t change your industry’s current cycle.
But at the same time, it’s not all instances. Findlay noted that even within weaker sectors there are “micro-conditions” that could play a role. While retail itself, for example, is currently a weaker prospect overall, retail pet stores remain strong as “people would rather throw themselves off a cliff than not have a pet,” he said. And if a retail company’s not a pet store? Findlay said comparative performance is still meaningful.
“People will always buy performance. Even within the same sub-sectors there are better performing businesses than others when you benchmark them. So ultimately, always performing above your peers from a benchmarking perspective would make you more attractive,” he said.
Beyond doing things to be more attractive, it is also important to avoid things that make a company unattractive. Fitnancial's Weinstein said beyond the obvious concerns like IRS issues or pending litigation, a common red flag is an overdependence on the company founder. While it’s all well and good for the founder to have a strong personal brand, what happens when that founder leaves?
There’s a lot of focus, especially with service-based businesses, on building personal brands, which can actually be detrimental to a sale because there’s an over-reliance on the founder. That then chains the owner to the desk, and if they do leave, the business’s value can be dinged, Weinstein said.
DeepSky’s Hsu, meanwhile, said sellers must pay extra-special attention to cash flow, saying buyers will look askance at any perceived extravagance even if the seller is simply trying to expand.
Findlay, meanwhile, said sellers shouldn’t gloss over one-time events that, when taken as a whole, add up to a troubling pattern. One bad contract, for instance, he can understand. A history of bad contracts is far more concerning, even if sellers try to tell him otherwise.
These things can come from having not been fully prepared to sell, usually because it never occurred to people that they would actually do so one day. Weinstein, from Fitnancial, said the prep work for selling should really start before a sale is even on the radar, but conceded few think in those terms.
“I see a lot of businesses that didn’t design their business with the intention to sell, but their plans have changed because of economic downturn or generational differences,” she said. “No one saw it coming early on.”