Throughout every stage of buying and selling a company, a chief financial officer (CFO) needs to be nimble. A keen eye for detail is crucial; prioritising cash flow and administering diligent financial stewardship ultimately remain the CFO’s responsibility, and they are the very foundation of everything they do. But an ability to recognise risk and opportunity and act proactively means that the modern strategic CFO must wear many hats.
And when we consider that, during investment and exit cycles, a CFO’s chief goal is to maximise enterprise value, modern-day CFOs have become both the workhorses and heroes of acquisitions and exits.
But what skill sets are essential in CFOs for successful completion?
Across the detail: stewardship, strategy, and value
As one CFO notes when describes the importance of good financial stewardship, “if the numbers slip during the process, you lose credibility, and lose competitive tension. The day job is very important during the exit process.”
Research from Deloitte amply demonstrates that investors expect CFOs to stay on top of the detail and give accurate numbers. In other words, the basics. “Inaccuracy in the numbers or weaknesses in controls,” notes Deloitte, “will take the gloss off credibility and in extreme cases can even result in potential buyers walking away.” It’s all about credibility.
Given the demands placed on CFOs to perform a more strategic, forward-thinking, and holistic role way beyond traditional financial reporting and transactional processing, there’s a delicate line to tread between the basics, the strategy, and the demands of maximising enterprise value. In a world in which CFOs are increasingly seen as “chief future officers” rather than chief financial officers, are the demands of the role becoming unrealistic?
There’s little doubt that this fine balance requires a rare skillset that includes agility, expertise, and nimbleness across more than one business function. And all this must be conducted with a pragmatic and sanguine approach.
It's certainly up for debate whether the demands placed on modern-day CFOs during these cycles are unrealistic, but what is certain is that CFOs must be prepared to swallow a few contradictions. At the same time, research indicates that some CFOs wish to be set free from the daily “grind” of number crunching and focus attention and experience on strategy and value instead. The same research suggests that investors can be wary of CFOs who pay only lip service to the basics. “There is a perception,”, notes Deloitte’s research, “that where CFOs play in the strategy, they do this at the expense of being close to the detail and numbers.”
Whilst “play in the strategy” may be an unnecessarily dismissive take on the tangible value a capable and truly strategic CFO can add, investors’ and buyers’ attitudes nevertheless need to be taken into account and managed. Sometimes, genuine strategic expertise isn’t recognised for what it is: an essential element of successful completion.
In short, it’s just one indication of the many contradictions, demands and challenges that successful modern-day CFOs must take in their stride during these cycles.
Forward-thinking, proactive, and communicative: evidencing risk-management activity
In addition to their responsibilities for transactional processing and financial reporting, the strategic demand on modern-day CFOs means they must be able to spot risk and, where possible, collaborate to mitigate that risk. Successful exit planning requires them to not only identify and mitigate risk, but, critically, demonstrate conclusively to investors or buyers that all risk factors have been removed or mitigated. In short, they must be able to evidence risk-management activities. For example, a strategic CFO will identify and assess insurable business-risk factors and seek adequate cover to protect the enterprise in the event that business risk can’t be mitigated operationally.
This is one of the most crucial aspects of a CFO’s role during the exit process, as it protects the enterprise from value leakage. In short, a failure to evidence risk mitigation can easily turn into unwanted price-chipping at precisely the time a CFO’s chief job is to maximise value and minimise potential weaknesses. After all, during an exit process, enterprise value is the most important key performance indicator (KPI) of all.
The collaboration necessary to evidence the removal of risk factors is yet another important strand in the complex role of a CFO during exit. CFOs must collaborate efficiently with a broad spectrum of stakeholders and business functions, from finance and technology to CEOs and investors.
When we look at the demands on CFOs’ communication during exit, the watchwords are timely, effective, and pragmatic. And that’s as true for bad news as for good, perhaps even more so.
Accurate, articulate, and credible: adding value and de-risking exit
The most successful CFOs will, with the right combination of accuracy and credibility, help potential buyers understand what drives growth in their business, and serves as evidence of the evolving role of the finance function within a business.
In the sense that buyers are likely to pay a premium with the right levels of confidence in a business, this aspect is a crucial part of a CFO’s potential influence. From a buyer’s point of view, when it comes to maximising value, Deloitte’s research is revealing: investors cited high quality management information as the single most important tool at a CFO’s disposal for influencing EBITDA (earnings before interest, tax, depreciation, and amortization) when they considered EBITDA and multiple separately. Let’s not forget, during exit phase, enterprise value is a CFO’s most important KPI. As one industry insider puts it, “stripped back to the basics, it is all about evidencing the quality of the business.”
Whilst a CFO’s ability to influence the multiple rather than just EBITDA can often be a moot point, a higher multiple or enterprise premium is heavily influenced by buyer confidence in a business’s ability to outperform competitors and other asset classes. That, in turn, is driven by hard evidence of the growth momentum of an enterprise, its resilience or immunity to any external influences, and most crucially of all, the ability to evidence risk removal or mitigation. As Deloitte’s points out, “understand these qualitative points of difference in your business, and then go further to evidence them, and you will be adding real value to the sales process.”
At the centre of value creation
A CFO’s role during acquisitions and exits is nothing short of pivotal. As expectations and pressures grow, an undeniable broadening of CFOs’ roles and responsibilities beyond traditional financial reporting places them at the centre of new value creation and risk-management activities.
“The CFOs that stand out,” as EY notes, “are those with the ability to unearth and deliver on new value creation.”
They are, in essence, the workhorses and heroes of today’s acquisition and exit landscape.
