Strategic Exits: How CFOs Shape the Future by Preparing the Past

Jul 2, 2024

Authored By Eric Walczykowski​

Eric W

Many in the private equity sector are gearing up g for a potential surge in M&A and exits later this year. Overpopulated portfolios are creating pressure for exits and preparations are underway in many companies.

I sat down recently to discuss this with Nick Leister, Private Equity Director for CrossCountry Consulting, one of our alliance partners delivering integrated solutions for the office of the CFO.

Here is a summarized Q&A of my conversation with Nick about exit readiness strategies for Executives, specifically the CFO.

CrossCountry is a valuable alliance partner of Bespoke Partners, particularly as it relates to our financial officer’s practice. Today, we’re going to talk about how the right CFO can create maximized value during an exit. This is a particularly important topic as we think about 2024 and the focus is on exits for private equity firms.

Eric: Nick, what are some of the diligence requirements you guys are seeing from buyers that should act as a guide for those who are looking to sell when the market picks up?

Nick: Currently, we’re seeing a significant uptick in diligence requirements in the market, with buyers digging deeper into diligence processes and demanding more from management teams. This heightened scrutiny necessitates the provision of clean and robust data sets, both current and historical, which are crucial for financial modeling and Quality of Earnings Verification (QEV) efforts. In the software and SaaS sectors, focus areas include the Annual Recurring Revenue (ARR) snowball, where buyers are keen on a detailed analysis that covers price increases and churn rates to net and gross retention calculations. This depth of information helps buyers grasp the business trends fully and build confidence in the company’s trajectory. For businesses that have grown through acquisitions, it’s crucial to standardize key metrics on an apples-to-apples basis for accurate comparison and analysis. This often requires management teams to revisit, recalculate, and redefine these metrics to ensure they’re consistently presented. Highlighted metrics such as new logo and renewal bookings, along with headcount and key vendor expenses, are areas of scrutiny. Additionally, strong support for any EBITDA adjustments is vital—gone are the days when ad-backs could be assumed correct without question. Now, a detailed schedule is necessary to justify these adjustments transparently to potential buyers, showcasing the need for each modification.

Eric: If I’m thinking about going to market, preparing for diligence and trying to get the buyer’s eye, how much time ahead would I need to engage a firm like yours to be in best stead for that acquisition?

Nick: Twelve to eighteen months is an ideal timeline to start a sell-side readiness project. It gives you time to do the right preparation in terms of cleaning up the data, analytics to support the kind of key questions that you’re expecting from buyers. And have good answers for when you approach the market on the business trends. It also gives you time to adjust in the business where you can adjust around expenses, trends and sales and get ahead of the story. So, when you go to the market, there’s a clean EBITDA for the last 6 to 12 months. where you can point to and say, this is a true run rate of where the business is going. And you have the clean data set and analytics to support that trend, thus making it less likely a buyer is going to have issues with any of the reported financials you’re presenting.
Tailored Talent - Nick Leister

You can see the full interview with Nick in our Tailored Talent vodcast series, here.

Eric: One of the key things that someone like you brings from the outside is not only your expertise in the subject matter, but you’re doing acquisitions or acquisition readiness repeatedly.And so, as you’re putting that together, you can help me with that critical lens, wouldn’t you say?

Nick: I think where we approach it from is really trying to take that outside-in view of here’s where we’re seeing other buyers in the market digging in. Here’s where you want to make sure you have the right level of granularity, the right level of support as you go to market. And really being the ones who were putting people in place who have done this over and over again and provide that really kind of additional arms and legs for the CFO to feel comfortable going through the process. The aim is to work closely with third parties towards the successful execution of a transaction, recognizing there’s lots of parties involved, as well as still having to manage the day to day of the business. It’s important to have the right person sitting next to the CFO, helping to drive that process while knowing the CFO is the overall owner of this process.

It's important to have the right person sitting next to the CFO, helping to drive that process while knowing the CFO is the overall owner of this process.

Eric: When we think about the interplay between the CFO and the Project Management Office (PMO), talk to me a little bit about the roles in the acquisition preparation and acquisition process.

Nick:

The CFO is central to driving the transaction process, owning the preparation of financials, analysis, and the communication of the equity story to investment banks and potential buyers. Over the 12 to 18 months leading up to a transaction, the CFO is pivotal in crafting the roadmap, addressing critical issues, and setting priorities while providing vision for the function and ensuring the right support for the transaction. Additionally, the CFO manages day-to-day activities, contributing significantly across various areas. The PMO plays a crucial role as the right-hand person, driving the day-to-day execution of the roadmap in deal preparation. This includes supporting key analyses, managing reporting requirements to anticipate buyer inquiries, preparing for data room needs, and handling accounting diligence reports before going to market. Furthermore, the PMO is instrumental in coordinating with all third parties involved in the transaction, from Quality of Earnings providers to investment banks. This role ensures that all parties receive the necessary information promptly, maintaining the overall process flow and ensuring that internal and external coordination keeps the transaction on track.

Eric:The coordination and data gathering involved can easily be underestimated, making additional resources invaluable. This allows the CFO to concentrate on steering the process effectively, rather than getting bogged down in the minutiae. What are the risks if you don’t have the right folks in the role and what can you do to mitigate that during the process?

Nick:

The human element is vital in business processes, especially in sales where strong leadership is crucial for managing the extensive time and effort required. These processes are typically large-scale, carrying significant risks that can impact other business activities if not managed well. Competent leadership is essential to avoid prolonging these processes and exacerbating risks, ensuring that other areas of the business are not negatively affected. Leaders not only drive the sales process but also manage other significant projects and initiatives across the company. Without sufficient support, these initiatives could suffer from delays and increased stress, potentially postponing critical projects due to insufficient bandwidth to effectively manage and support them. Additionally, focus and organization are paramount, particularly through strong support roles such as a controller, FP&A lead, or a third-party PMO. These roles are critical for organizing and presenting information clearly to make a stellar first impression on potential buyers. A well-structured presentation significantly affects how investor’s view and interact with the business. Moreover, if leaders lack experience with transactions, it can introduce inefficiencies, further prolonging the process and driving up costs due to unfamiliarity with the necessary responses to transactional challenges.

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Find additional information on Bespoke’s CFO practice here: High-Impact Finance Executives – Bespoke Partners

Eric: When I think about this conversation today, it was so timely given the focus on exits this year and just about the M&A process in general.

There are tens to hundreds of millions of dollars at stake and preparation is so important. Not only in maximizing value, but I think both you and I can agree on our experience of doing deals in some cases even getting the deal done and showing that you’ve got your act together you’re an asset that’s top grade and worth pursuing.

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Want to learn more about Bespoke’s industry leading search services for finance executive search?

Head to https://www.bespokepartners.com/high-impact-finance-executives/ for more information and contact our Finance Practice team to find out how we can help navigate your next CFO hire.

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About CrossCountry Consulting

A leading provider of specialized finance, operations, and technology advisory services, CrossCountry Consulting partners with Fortune 500 companies, emerging growth market leaders, and private equity sponsors, and excels in solving today’s most pressing challenges and creating future enterprise value.

Connect with CrossCountry Consulting to learn more:

About Bespoke Partners

Bespoke Partners is the largest recruiting firm solely focused on software and SaaS companies, and we specialize in firms backed by private equity sponsors. Bespoke Partners can help companies seize emerging opportunities by staying ahead in the software and SaaS leadership market.

Connect with Bespoke Partners to learn more:

Eric W

Author:
Eric Walczykowski

Chief Executive Officer

Eric is passionate about building high-performing teams that value doing their best, working together, overcoming adversity and learning.

As a proven growth executive, Eric has served as CEO, President, Board Member, Investor and Advisor for technology companies that achieved over $4.5B in successful exits.

Eric brings to Bespoke Partners significant professional services experience from Deloitte and Andersen, as well as the high-growth client executive perspective for private equity-backed technology companies.

Eric earned an MBA from the Kellogg School of Management at Northwestern University and a BS in Business from Fresno State University.

Outside of work, Eric enjoys spending time with family, coaching baseball, travel, attending live events and sipping good wine.

Nick

Featuring:
Nick Leister
Director, Private Equity
CrossCountry Consulting

About Nick

Nick brings a wealth of expertise from CrossCountry Consulting, a leading provider of specialized finance, operations, and technology advisory services. With a track record of partnering with Fortune 500 companies, emerging growth market leaders, and private equity sponsors, CrossCountry Consulting excels in solving today’s most pressing challenges and creating future enterprise value. Nick’s extensive experience in areas such as accounting and risk, technology-enabled transformation, and transaction solutions makes him an invaluable resource for understanding the intricacies of preparing for a successful exit.

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