The Modern CFO: The CFOs role in preparing a business for exit

1. Looking back, what do you wish you had done differently three years before the exit process began? 

There are always a lot of things you wish you'd done differently. One of the main things would have been to get the leadership team thinking about the exit before an exit trigger, and what that means for operational decision-making. As a business, you need time to decide the story you want to tell rather than having to justify the story you ended up with, and you ideally you want to be in a position to control the narrative.  

I would also have made the five-year plan much more visible in decision-making. Often the five-year plan is a document that gets dusted down annually and revised, but the plan is actually your business story. You need to understand if there is a disconnect between this and what people do day-to-day and if so, why, as this becomes very important when you're sitting in front of a potential buyer.

Additionally, I'd have put greater emphasis on sustainable cash flow growth, because ultimately this is creates sustainable value growth. Businesses tend to focus on targets such as revenue, EBITDA, and customer acquisition, but ultimately, you need to understand what is really driving the growth in the value in of the business. I'd therefore put much more emphasis on KPIs such as cash flow and return on invested capital.  

Most teams within a business understand things like market share and revenue growth. Both of these add value, but for value to be sustainable, you've got to go deeper than that. For example, how much is the businesses revenue recurring? Is it concentrated between one or two customers, or a handful of customers or is it diversified? It's all about risk, and sustainable value means reducing the risk associated with those future cashflows because, ultimately, the valuation of a company is based largely on its projected cash flows.

Also if the exit plan plays a bigger is part of the management meetings or a bigger part, it focuses the leadership team on what actually drives value creation. A lot of management discussions are about, "How do we grow this?" or "How do we grow that?" But if you don't link those decisions back to how they create value, different parts of the business can start heading down different paths. Again, all of that eventually comes out during due diligence. A lot of time can be taken up retrospectively explaining justifying whys one thing happened, rather than how it fits in the overall story already having the information and explanation to hand.That can suck up a lot of resources because, at the same time, when going through the due diligence process, you're still running the business. Minimising the impact of due diligence on the day-to-day business is there fore really important.

One other thing I wish had happened differently is that I'd been brought into the business earlier, so that I could have put influenced more of this in place beforehand and helped to shape things. That's actually quite a common problem inthat businesses often don't have a CFO early enough and only bring one in when they think they need one, usually when anexit has already been triggered. prior to the set-up already being done. Inaddition, Thinking about your exit early on, it means that you can start to prepare early. It helps you shape how you manage your financial andoperational processes, which can help minimise the amount of data cleaning retrospectively. If you're doing all those things up front, there's a much lesswork to be done at the point of due diligence

2. What were the metrics or indicators that you focused on improving the increased attractiveness of the business? 

One of the most important areas to focus on is cash flow. In my experience, it is often one of the least understood metrics across a leadership team. Many of the C-Suite view cash flow as solely primarily the CFO's responsibility, assuming that as long as they are getting paid and there is money in the bank, everything is fine. In reality, cash flow is a business-wide issue, and a key indicator of value, resilience, sustainability, and cash allows the business to have options.

To make cash flow more tangible, I usually ask the rest of the leadership team to focus on the factors that influence it. Customer concentration is a good example that I use. Businesses that rely heavily on a small number of customers carry significant risk, as the loss of a single client can have a huge impact on revenue and cash. If this is the case, I'd advise businesses to diversify their customer base from a risk perspective.

Recurring revenue is another important indicator. Businesses with predictable, contract-based revenue streams are generally viewed more favourably by investors and acquirers because they provide greater visibility of future cash flows. Where possible, businesses should look for opportunities to increase recurring income through products or contracts that enhance this. It is equally important to understand the cost of acquiring and servicing customers. I'd advise leadership teams should look beyond the headline revenue figures and assess how much time,resource and investment is required to win and maintain each client relationship. Some clients require more resources than others, and this is important to know to understand where the cash is coming from, to help the leadership team know where to focus theirs and their businesses efforts.

Beyond financial performance, succession planning is another area that is frequently overlooked, and in my experience in working with SMEs, many can be most are very founder centric. This then poses a is obviously a risk as to if something happens to the founder or when if they step away for from the business, this can be detrimental as they are usually heavily involved and the core decision maker. Building a broader leadership team, delegating responsibilities and hiring in necessary the skills can help reduce this dependency on one person the founder and to makes the business more attractive to buyers.  

Finally, a piece of advice is to address operational issues asap to prevent them becoming long-term problems as these can compound and then be flagged during the buying process. Matters Issues such as aged debtors, contract disputes, compliance concerns or unresolved tax issues can linger for years if they are not prioritised. Just close these issues, because these are all potential red flags. which you want and you want to minimise these red flags as much as possible. While these issues may appear as minor during the day-to-day, they often attract disproportionate attention during a due diligence process. A relatively small bad debt or compliance issue, for example, can generate a lot of questions about why it arose, how it was dealt with, and why it is still there. Owners do not want to spend additional time addressing preventable concerns during a transaction. Dealing with these issues in advance helps minimise red flags, reduces disruption during due diligence process, and puts the business in a stronger position when engaging with potential buyers.

3. What surprised you most during the due diligence process?

The biggest surprise for me was how intense the process is. In the exit I was involved with, I was the sole person answering the due diligence questions related to finance and financial processes.

I hadn't appreciated just how many hundreds of questions there would be and the forensic evidence must to be provided. It seemed almost feltlike each answer  question generated more questions another. For example, if they ask whether you've had any tax issues and you say no, effectively the response is: show me the proof. R&D Tax Credit claims were part of that process as well and our buyers wanted to seethe documentation behind the claims and understand how they had been prepared which makes it important to seek expert advice as all of a company's financials will fall under scrutiny during the buying process. 

Due diligence can also be a significant cost to the company in resources as well as monetary cost. The time involved to complete the due diligence as well as doing your day job is not to be underestimated. During the time of preparing the business, I was working as a fractional CFO, but during the most intensive part of the process I was effectively full-time for a couple of months. I would recommend if there is an option to get additional resource in during this time then do so.  That's why getting your house in order beforehand is so important.