Issue Twelve: Exit Readiness CFOs
2024-10-25
EXIT READINESS CFOS
By Harry Hewson, MD, Camino Search
In this week’s Exec Edge, we’re tackling the ripple effects of the anticipated capital gains tax hike in the autumn budget. With the pressure on to close deals before the rates rise, the demand for CFOs who can navigate these accelerated exits is at an all-time high.
Capital gains tax is the tax levied on the profit made from selling assets like stocks, real estate, or business interests.
When tax rates on capital gains increase, a larger portion of the profits from these sales will need to be paid to the government, reducing the amount that sellers can keep.This has prompted many funds and founders to accelerate the sale of assets, eager to cash in before increased tax liabilities affect returns for themselves and their LPs.
These pending changes have also prompted an increased focus on bolt-on acquisitions of smaller complementary assets, allowing companies to enhance their value quickly through additional revenue and market share before selling.
The rise in transaction volume has driven greater demand for experienced exit and M&A CFOs to help navigate these complex deals and ensure efficient processes.This article explores the role CFOs play in exit readiness, including why interim CFOs may be brought in, and the key traits that make a great exit CFO.
The role of the CFO in exit readiness
CFOs play a crucial role in preparing a company to exit, creating a compelling financial narrative that attracts investors and potential buyers and managing a wide range of financial and strategic complexities. Companies will typically spend 2-3 years working towards a transaction, showcasing sustained performance to validate the company’s growth trajectory and the robustness of its financials.
If the incumbent CFO lacks the necessary expertise, they are often upskilled or replaced at least 12-18 months before a deal by someone with proven transaction experience.
Packaging the business for market involves more than financial preparation; it requires aligning operational efficiencies and crafting a narrative that highlights growth potential. An experienced exit CFO will be equipped with a playbook from previous successful transactions.
They will bring insights from working with investors, having seen what good looks like, dealt with similar personalities, and understanding what key triggers need to be hit to guide the process from pre-deal preparation to post-deal integration.
Pre-deal, the CFO will be crucial in optimising the financial health of the business and making it more attractive to potential buyers, either enhancing the bottom line through strategic restructuring and cost reduction to maximise returns, or business partnering company leaders to improve the top line. Ensuring that all aspects of the business are streamlined, their objective is to minimise concerns during due diligence and maximising the perceived value.
Key responsibilities may include managing debt and leverage to improve cash flow, refining the company’s financial narrative, and building strong relationships with advisors including investment bankers and legal counsel.
The CFO will lead investor roadshows, presenting financial forecasts, KPIs, and the company’s growth story to build trust and generate interest; “the goal is to create a clear equity story that highlights the company’s future potential and drives competitive bidding,” says Associate Director, Tom Garratt.
In this context, a CFO’s ability to inspire confidence through conveying strong vision alongside accurate financials is as vital as their technical skills.
When and why might an interim CFO come into play
Bringing in an interim CFO with exit experience is one of the most strategic moves a company can make when preparing for a transaction. “These CFOs are typically high-impact experts in restructuring, transformation, or corporate finance, that offer flexibility in both cost and time,” says Tom Garratt.
Crisis Management
Interim CFOs may be brought in mid-transaction as part of a crisis management strategy where the deal is not going to plan, either to rectify discrepancies, inefficiencies or to refocus the team on key deliverables to move the deal forward.Experienced interim CFOs often have established PE networks that can be leveraged to engage potential buyers, facilitate negotiations, and build trust which may be critical in salvaging a faltering deal.
Mentorship
“Interim CFOs can be valuable mentors to junior FDs or CFOs, offering an unbiased perspective and helping to identify areas for improvement while guiding them through the exit process,” says Executive Talent Partner, Matthew Pallant.
During a transaction, when finance teams face increased demands and scrutiny, an interim CFO with exit experience can provide crucial support, helping the team navigate complexities and driving necessary changes for exit readiness.
Succession planning
Companies may also choose to hire an interim CFO to fill leadership roles while developing a long-term succession plan, ensuring a smooth transition for a permanent CFO to be brought in post-transaction.
Transformation
Interim CFOs who specialise in transformation can be a great asset to a business looking to exit. They are often engaged for streamlining processes through automation, systems implementation, leading on integrations and carve outs, establishing financial control frameworks and restructuring initiatives.
Financial Operations
An experienced interim CFO can act as a fresh pair of eyes to quickly and objectively identify inefficiencies in financial reporting, cash flow management, and operational spending. “Interim CFOs know what good looks like and are adept at ensuring that financial data is transparent, accurate, and ready for rigorous scrutiny, ultimately positioning the business for a successful exit,” says Matthew Pallant.
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What makes a great exit CFO?
When hiring a CFO ahead of an exit, most of our clients are looking for someone with a solid track record and real-world experience in transactions. “A seasoned CFO knows what good looks like and has the exit 'battle scars' to prove it,” says Tom Garratt.
“Typically these executives will have a background in PE, investment banking, or transaction services, giving them a depth of understanding on how to position a company for sale,” says Matthew Pallant”.
A great exit CFO will be skilled at communicating with stakeholders, managing investor relations and supporting negotiations to secure the best deal terms and maximise shareholder value. They know how to build strong relationships with investors, board members, and other important figures to keep everyone aligned on the company’s exit strategy and financial performance.
The concept of what good looks like for an exit CFOs can vary significantly based on the nature of the transaction. For example, the type of CFO required for a strategic sale to a larger competitor focusing on synergies, may be very different to the CFO required for a PE buyout focusing on restructuring.
That being said, sometimes funds will opt for sector experience over transaction experience, especially when operating in niche markets, leveraging a CFO who can bring valuable industry-specific insights into market dynamics, regulatory considerations and competitive landscapes.
Firms may also favour candidates based on the geography of the potential buyer. Local knowledge is valuable for navigating cultural nuances and regulatory requirements, which can significantly influence negotiations. A CFO experienced with buyers in specific regions may be better positioned to align financial strategies with buyer expectations, increasing the chances of a successful exit.
Personality also plays an important role in the making of a great exit CFO. The most effective exit CFOs are those with high integrity who stay calm under pressure, and are able to navigate complex dynamics with confidence and diplomacy.
COMING NEXT
Executive Edge is Camino Search’s bi-weekly column, showcasing our insights on the market, talent acquisition and business strategy, authored by Founder and Managing Director, Harry Hewson. The next article will explore the role of the chairperson and how it is evolving.
