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Exit Planning? Why You Should Start Early

Exiting your business is a lot like selling a very good used car (or the home you’ve lived in for 25 years). A lot can look good on the outside, but a lot can go wrong if the buyer takes a good look at the inside. That’s why you want to start early, get a skilled mechanic to check it out, and address those hidden flaws that can torpedo a sale, sometimes at the 11th hour. Here are a few examples we’ve helped with over the last few years:

  • Asset valuation didn’t hold up under scrutiny – this most often happens with inventory, frequently the most valuable asset in terms of size and timeline for cash conversion. We had a recent deal go south because the company managed its inventory valuation to minimize taxes, then changed its approach to prepare for going to market, but the transition created distrust that ultimately scared away the most promising buyer. The message is clear here – plan ahead and remember that tax bills are virtually always smaller than sales prices.
  • Facility consolidation was in the buyer’s plan, but the transition cost was perceived as too high. Often the case with a small business that a larger company wants to acquire, perhaps for their customer list, their technology, their advanced equipment or staff capability, or to make use of the buyer’s excess capacity. The customer list can be moved, but the rest come with challenges that don’t pay off if the seller’s bottom line isn’t rich enough to support the move. We had to focus our efforts on nearby prospects, thus limiting the range of possibilities.
  • The always present disagreement over price vs. value – the seller wants X, they buyer wants to pay less. Only rarely is this not an issue, whether the buyer is a strategic buyer or a financial one. In a current deal we are exploring the possibility of closing that gap by use of an earn-out variation that isn’t based strictly on bottom line – and all the variations in calculating that – but on sales volume that is predictable and reliable, as in a multi-year fixed price contract with key customers. This could be an opportunity for a win-win instead of a walk away.
  • Absence of a management team once the sellers leave – a tough challenge if the sellers carried a lot of the middle management responsibilities personally to keep costs down, but now want to walk away free with cash in the bank. We got our client to start thinking early about the positions they would need to fill come exit time, in this case 4-5 years earlier. The plan was good but the sellers liked the profits they brought home and didn’t act on the plan. The result was the need to stay with their company after the sale to enable time to develop a replacement management team or to train the buyer’s team in the hidden nuances of the business. Departure delayed.

Our prediction a few years ago that this decade would see a lot of privately owned companies put up for sale is certainly coming to pass, and happily there is still a fair amount of money looking for the good ones. The trick is for the good ones to look like good ones from the beginning, rather than having to prove it during due diligence, and that requires preparation – a plan that is well crafted and then carried out. And that doesn’t happen in a few months, it happens when the owners start early and in earnest. We’ve said that means 4-5 years if the company needs some fixing, as nearly all do. Does yours? Are you ready to begin?

We are Your CFO for Rent.

Investment Policy – Do You Have One?

Many companies today are struggling with the effects of inflation and the aftereffects of COVID, and keeping enough cash to operate efficiently is a big challenge. But for others, cash management is a different kind of issue – they have more cash than they need to run the business, including many nonprofit organizations with endowment funds.

For the leaders of those organizations, cash management is more than just day-to-day operations. It’s also about what to do with the cash they don’t need on a day-to-day basis: What to do with it, where to put it, for how long, and what risks to avoid. The answers to those questions are different for every company, and they are ideally encapsulated in their cash management policies, ideally thought out and committed to a written policy. We normally call that an Investment Policy Statement, or IPS.

So, If you have excess cash AND your excess cash is in 7 figures or more, AND you don’t have an IPS, this post is very much for you. If you have a smaller balance to put to work, I suggest you choose a money market fund or a short-term CD – otherwise the effort to set up something more formal is not worth it. So, onward…

First, how do you decide what topics your policy should cover? The best experts in this area suggest these:

  • Risk tolerance – how much risk, if any, are you willing to tolerate in putting your excess cash to work? Always keep in mind that risk and reward to hand in hand, higher or lower together. Types of risk include the credit value of the investment, interest rate fluctuations, and ease of liquidity.
  • Objective – what do you want the investment to achieve? Do you want to exceed the current minimal CD or Treasury bond rates, just equal them, other? Are you prepared to commit your cash for a longer term or might it be needed next quarter or next year?
  • Benchmark – How will you measure the success of your cash investment against your stated goals? Is there a metric, or a blended metric, that you could use to readily see if you are achieving what you intended, both in returns and in risk management? And by the way, how often will you review the results vs. the benchmark?
  • Investment manager – Who will you task with managing all this? Choices range from your in-house CFO or treasurer to an outside investment manager. Differences lay in skill in achieving the desired results and cost in fees.

Well, there is one preliminary step – knowing how much excess cash you have. That’s not as easy as it sounds, since it involves actually having a credible cash forecast that tells you when that cash might be needed for seasonal activity, owner distributions or new projects. Are there any bank loan covenants that require you to keep cash balances readily available or do not permit certain kinds of investment?

Admittedly, all I’ve covered in this post are the questions to ask, not the answers, because those answers are unique to each company, and attempting to cover them would require a book, not a 500-600 word blog post. So if you’re still reading, the next step might be to ask your financial advisors to help you formulate the answers that work for you. Or you could ask an independent financial expert to help you develop some answers. Don’t have one of those in your database? We do.

We are Your CFO for Rent.

CFO vs. Controller – What’s the Difference?

We have a client who engaged us to help them integrate an acquisition and structure a financial function for their rapidly growing company and guide its financial strategy as the company grew. Or at least we thought that was the plan. Along the way the CEO hired a (well qualified) Controller and guided the role of his fractional CFO to project work in support of his Controller. This reversal of traditional relationships led me to reflect on the important differences that separate CFOs from their key team member, the Controller. Using a helpful visual aid, here are my thoughts.

The image at left was developed by us years ago to help CEOs understand the relative roles and responsibilities of the two positions. Labor intensive duties at the bottom, leadership intensive duties at the top, with each layer requiring more of one or the other. Each company leader has to look at the functions stacked in the triangle, from the least complex at the bottom to the most complex at the top, and ask themselves “Where does my Controller’s ability stall out so that someone else needs to step in to ensure it’s done right?” That’s where a line gets drawn.

The next step is to look at the functions above that line and ask:

  1. Who’s going to do all the functions above the line?” If the nature of the company is that a particular function is not likely to be needed in the foreseeable future, ignore it.
  2. But if it’s needed today or very soon, does the CEO have the skills and time to fill that role personally AND stay focused on the job of being the leader of the company?
  3. Or will it be OK to let the Controller learn on the job and hope it comes out right?
  4. Or will it be some combination of the two options, a shaky middle road demanding time and risking the outcomes?

Now suppose that the CEO understands the situation and doesn’t like any of the above options – big surprise. The choices left are (a) hire a more seasoned Controller, (b) add a CFO to the management team, (c) engage a fractional CFO, (d) beef up the financial department with an FP&A manager and a treasurer – oh, then the job of overseeing those new hires becomes an additional duty of the Controller or the CEO. Oh well, nothing’s perfect, as we’ve learned. But there are solutions that are less imperfect than others. I suspect you already know what we’d suggest – the highest level of expertise you need, but only for the amount of time you need it. But then that’s why my firm exists.

We are Your CFO for Rent.

Where’d the Money Go?

Imagine this: You’ve had a really good year so far, after the mess of the last couple years. Top line revenue looks much better than expected. New business is up, returning customers are buying again, and your sales team are feeling great about the prospects for the balance of the year. Only one problem: Net Income is  a lot less than you would have expected, and you don’t know why. But the urgency created by the surge in revenue puts the question aside – it will work itself out as long as the sales success continues.

Not so fast…

Maybe that’s exactly the time you need to stop and ask yourself: Am I missing something? Just because there isn’t an easy and comfortable explanation, do I push past it and hope it all works out in the end? Alternatively, How do I pour over the mass of information in the accounting records to isolate the reasons income isn’t matching sales?

The answer could be the difference between a foundational year that lays the groundwork for years of outsized profits or the start of a ‘work harder just to keep even’ approach that sooner or later burns you out. This may be the perfect time to make that choice.

Here’s my suggested method for isolating all that data into pockets that provide answers instead of just questions. We’re using this technique with clients across the country today, and the results are reassuring, encouraging and most importantly, informative:

  1. Ask your accounting team to put your P&L trial balance into a spreadsheet with 5 columns:
    1. Column 1 – actual amounts recorded to each account so far this year
    2. Column 2 – what you expected to see in that account at this point (obviously much easier when you’ve developed a budget or profit plan at the beginning of the year, but lacking that use your best estimate of what you expected to earn or spend)
    3. Column 3 – the difference between the two, the variance if you will
    4. Column 4 – Your part: enter here the question you want answered based on what’s in Column 3
  2. Have your accounting team go back and research the most impactful answers to those questions. Have them ignore all variances that are less than 10% out of line with expectations. This is not a laundry list of small differences but the 1 or 2 reasons they see that account for most of each line item variance, whether positive or negative (because you want to know both, no?). Ask them to record their summarized responses in Column 5.
  3. Now, sit down with your team – this should ideally be your accounting team and your key management team who will often be able to shed light on aspects of the responses that are beyond the knowledge of your accounting team. Having that all happen in the same room at the same time makes everyone instantly smarter.
  4. Now, decide if any of that valuable information guides you to make any changes in how business is conducted for the balance of the year. You will either see an increase in net profit margins or a clear vision of the changes that need to be made for next year. Maybe even a more formalized process for developing and implementing a 2023 profit plan (“Budget”).

Would that be such a bad idea? Ask our clients who’ve tried it and (sort of) love it.

We are Your CFO for Rent.

Does Your Business Model Need to Change?

We took on a new client back in 2019, a British entrepreneur who wanted to open a food and entertainment venue in Los Angeles to copy a successful model he’d developed in London. While he researched possible locations, we helped him refine his business plan, polish his pitch, and develop contacts to raise capital. We were prepared to represent his financial prospects to potential investors. Then 2020 arrived. The project stopped dead in its tracks and was subsequently abandoned.

On the other side of town, we stopped going to a favorite restaurant when they decided to remove their temporary outdoor seating and move back indoors, seen as a premature move by some in our group and apparently others as well. Their parking lot has not been full since we left, despite their avid fan base previously.

To those depressing stories we can add the movie theaters that never reopened, the restaurants that are gone forever, and the storefronts that remain boarded up to this day, replaced by huge growth in subscription TV movies, Zoom gatherings that used to be lunch and dinner meetings, Uber Eats, and countless other enterprises that couldn’t find a way to modify their business model to adapt until the pain of coronavirus receded.

The 5 questions virtually every business owner need to ask themselves today are these:

  1. Has your business been damaged by the last 2+ years of hunkering down?
  2. Have you adapted to the extent you could, to mitigate the damage?
  3. How will you prepare for the ultimate recovery that appears to be manifesting (monkeypox fears aside)?
  4. Or, do you foresee that a full recovery will never happen, and we’re in a “New Normal”?
  5. Do you have the capital and the financial roadmap in place to regain your place in the market? Is the talent on your team the right mix for that comeback?

Those are questions, both operational and strategic, that will determine the future success of your business. Answering them requires introspection, planning, leadership, and money.

We have the ability and experience to help you with several of those, just in case you don’t.

We are Your CFO for Rent.

Employee Loyalty: 5 Ageless Ideas

It’s amazing how some business problems just keep coming around again and again. I looked at some of our published guidance from 25 years ago and saw an interesting piece on the disloyal attitude that so many employees had for their employers (often richly deserved, I might add). The manifestation of that problem was high turnover, unfilled job openings, and low productivity. Seriously? Where have I heard that before? Back then it was more basic than pay rates, but the painful results looked the same. After all, it isn’t always about the money.

As I sat with a client company this week whose owners are preparing to sell the company, that issue came up as an obstacle to a deal, because the higher skill level needed to get work done – particularly if a company moves to another state, the more costly the effort to replace a departure, and the more damaging the company’s ability to perform in the meantime.

Reflecting on the five ideas we wrote about a quarter century ago, they still have merit in today’s employment climate. So, for your consideration, here they are one more time.

  1. Set high expectations. Highly motivated people love to overcome challenges, and they like being in an environment that doesn’t tolerate mediocrity. That doesn’t mean being ruthless for the sake of power, but to encourage the best to give their best, knowing they’re among their own kind.
  2. Communicate constantly. One CEO whose company has offices around the world sent all their offices videos of employees questioning management about company direction. Another practiced Open Book Management. Another simply allocated time to talk informally to employees one-on-one, listening and answering their questions personally. Each in his way was acknowledging that workers like to know what’s happening directly from management, not from the rumor mill or the internet.
  3. Empower, empower, empower. Employees feel best about a company that gives them a sense of responsibility for their work not achievable any other way, according to many experts. Relying on people who are closest to the work to make sound decisions, with management guidance instead of direction, drives loyalty down to the team level, where it’s felt most strongly.
  4. Invest in their financial future. People who don’t know the basics of investments are having to plan their own retirement these days, and it’s scary to most, as it was then. Support with generous 401(k) matches, easy ownership of company stock (public companies only, of course), and other retirement-driven options, can bring big dividends without big price tags.
  5. Recognize people as often as possible. One company started a program called “I Caught You Doing Something Right,” and awarded $250 each week to some worker for a job well done. (OK, maybe a different number today). Some of the most driven CEOs we know don’t know how to say “Well done,” but they’re quick to note performance that isn’t. By emphasizing the positive, we tend to create more of it. Seriously.

Not original thinking, but then again it doesn’t need to be. Maybe you just need to focus on how this kind of thinking can fix a recurring problem and positively impact your company’s bottom line. We can show you how to do that.

We are Your CFO for Rent.

To CFO or not to CFO – That is the Question

I’ve been reading headlines recently about newly hired CFOs at several large companies. Some eye openers to be sure: PayPal delivered a package worth $6 million to their new financial guy. Walmart threw in a $5 million signing bonus, Pfizer paid their new CFO $5 million up front, and Moderna delivered a package worth over $5 million.

What are they thinking? Why do these huge companies think having a strong CFO on board is that important? By contrast, why do the CEOs of so many smaller middle market companies – especially the privately owned ones – think having a CFO at all is unneeded expense when they can do it themselves? The short answer, not surprisingly, is the bigger the numbers the bigger the impact a skilled financial leader can make.

But the longer answer, often unspoken, is that middle market CEOs are often shortsighted by underrating the impact a seasoned CFO can bring to their companies. And yes, it’s true that today’s competitive compensation environment means the good ones are asking premium compensation to come aboard and devote their full-time efforts to a single company. So too many CEOs believe their choice is to either pay the outsized compensation or go without.

Unfortunately, that’s both a bad decision and an unnecessary one.

The fractional CFO business that we created over 30 years ago is thriving today across the country, and while many draw the conclusion that that option is primarily for small, mostly local companies, that just isn’t true. Our client list over the years has ranged from $200 million companies down to $5 million (plus more than a few early stage). Our coaching services have aided CEOs in companies up to a billion in top line, and our current client base stretches from coast to coast. In these days of more frequent remote management, all a company needs to engage a fractional CFO from anywhere in the country is a competent accounting department, or the willingness to enable their CFO to transform a less-than-competent accounting department. We’ve had success both ways.

The call to action: If you are, or know of, a CEO of a middle market, privately owned company that is acting as their own CFO – and doing it poorly while neglecting the real job of being the top level leader their company really needs, consider this: Half a CFO will cost substantially less than a full-time one, even at consulting billing rates, and usually a company will need much less than half to make their critical financial decision making monumentally better. No signing bonuses, no stock options (usually), no company car or paid vacation. Just solid financial guidance from someone in the prime of their career who has been there and done that for companies with issues similar to yours. With great success. Sound worth exploring? Call us.

We are Your CFO for Rent.

ESG – Not What It’s Cracked Up to Be

If you sit on a Board or invest in equities (and read about how they’re doing) you have seen those powerful initials many times. Environment, Social, Governance – the phrase intended to fix everything that is self-serving about corporate America. Just one small problem: it’s not working.

The Economist wrote last week that there is such a “dizzying array of objectives” implicit in the phrase that no one has any ability to determine what strategy will develop acceptable ESG results and which won’t. Tesla is a “corporate-governance nightmare” but is helping tackle climate change. Closing down a coal mine sounds good, except for the workers and suppliers who lose their jobs. It doesn’t take a researcher to find lot of other examples in the corporate world.

In a special feature edition of the Los Angeles Times, a Deloitte survey of CFOs found that 2/3 of companies surveyed do not tie their compensation to performance against ESG objectives, even if those are set forth in their purpose statements to the world.

And yet investors and other stakeholders are looking for more emphasis on such things, leading many companies to stretch the reality a bit in their publicity – called “greenwashing” by the whistleblowers who see the realities. If profits are the real goal, it’s often more profitable to pass those costs through to customers and society as a whole rather than bear the cost of making a real difference.

So what to do? Well, that’s not our expertise, for sure, so I don’t have the answers. But I know the challenges of pursuing multiple objectives at once – the usual result is all get done poorly. So when The Economist’s writer suggests “the more targets there are to hit, the less chance of bullseye-ing any of them,” that makes sense to a management consultant, and perhaps to you too.

So how about this idea: Have your company choose one element of ESG that you can truly influence: emissions control, natural resource stewardship, waste management, better human capital management, homelessness prevention, honest labelling of products sold, solid governance practices in the Boardroom, etc. Then develop and implement an effective way to measure, monitor and report progress. Pay your executives meaningful incentives to pursue and make progress in the area you’ve chosen to invest in. And tell your stakeholders how you’re doing and how you’re doing it. Wouldn’t that make a great lead-in for your annual report?

We don’t know the answers – but we have some pretty good questions.

We are Your CFO for Rent.

Family Business Succession – How to Make it Work

Family-run businesses are in many respects the backbone of American business. They are typically the most stable of small businesses, with a much lower failure rate than other small business models. Some of the largest and most successful companies in America are family-owned and operated businesses. Yet 70% of family­ run businesses don’t make it to the second generation, and a full 90% never make it to the 3rd generation. Not new statistics, to be sure, but appalling just the same.

So why the embarrassingly high failure rate?

Most experts chalk it up to poor succession planning, as if a plan would somehow make it all better. While we are strong advocates of planning, we know that no plan will correct fundamental weaknesses in a business unless its managers recognize and address those weaknesses. So in this article we take a slightly different approach to defining what is needed. We’re going to go out on a limb and be specific about some of the problems we’ve seen that prevent many family-owned businesses from realizing (very much of) their real potential.

Please understand, we are not saying that all family-run businesses are fundamentally flawed, because they’re not. What we’ve observed, however, is that those that do have problems are often emotionally unwilling to acknowledge them or, having acknowledged them, are unwilling to make the hard decisions necessary to fix them. While far better than the 90+ percent average failure rate of small businesses as a whole, this is still a pretty dismal record given the advantages such businesses typically have: loyalty, strong family support systems, management continuity, long training periods for the next wave of managers, love and affection, etc.

How can you ensure your transition is a success?

  1. Treat your children in the business like any other senior manager. Evaluate their performance formally and objectively (as you do with your other employees), and help them work out action plans to correct deficiencies before they become excuses to fail. A child who thinks this is unfair may need to be employed somewhere else for a few years to get a flavor of life “on the outside.” Incidentally, if you don’t evaluate performance for any of your employees, no need to read further, and we wish you the best.
  2. Make a detailed list of the skills that are needed to succeed in your business – not just the ones you used to start the company, but the ones that will help the business grow in the environment in which it now does business. You may need help from impartial but knowledgeable outsiders to complete this one, but it’s worth it. Then build your would-be successor’s grooming program around that list, filling in the holes as needed.
  3. Outside advisors can be priceless (no reflection on their fees intended) in this They bring a broad range of expertise and a high level of objectivity. They don’t sit around the dinner table and glare at you in the evening and they don’t own part of the company. They are the experts from across town, whose advice will have the greatest chance of being accepted as unbiased
  4. Finally, consider forming an Advisory Board for your company, and populate it with advisors who can help you groom your sibling for that next step. Outside advisors can bring relevant skills that you and your existing management team may not have, and they bring the added benefit of being outsiders who are not already labeled by your son or daughter with preconceived ideas about how it should go. They can help you avoid making decisions that may not be in the best interests of the company – “Aw, let’s not push him so hard,” and they will likely be a good balance with the family members on the Board. Since you and the management team retain the decision-making power, you have nothing to lose and can only gain new benefits for you, your upcoming successor, and the company.
  5. Treat your children in the business like any other senior manager. Evaluate their performance formally and objectively (as you do with your other employees) and help them work out action plans to correct deficiencies before those deficiencies become excuses to fail. A child who thinks this is unfair may need to be employed somewhere else for a few years to get a flavor of life “on the “

Want some help thinking through all this? Call us. We know our way around this stuff.

We are Your CFO for Rent.

How Do Vacations Save Employers Money?

We often find ways to save clients money once we begin working with them: renegotiating bank loans, switching insurance brokers or providers, identifying hidden costs in underpowered accounting systems, etc. We also look for ways to improve internal accounting controls to ensure the business is run in accordance with its approved policies. Those two important elements in any CFO’s job description, whether fractional or full time, rarely intersect in a meaningful way because they have different objectives, unless you include the occasional sales person’s padding of expense reports.

But sometimes the stakes are much higher. Take the often overlooked policy that requires certain employees in sensitive positions to take periodic vacations, during which time their duties are performed by others. Staffing challenges being what they are today, that seems like an easy one to overlook. But two examples from our client files say “Not so fast” when it comes to the accounting department.

Example 1: Consider the payroll department in a small or midsized company, which may be only a single employee. That person keeps track of employee records, submits payroll data to the accounting department – or more often these days to an outside payroll service that doesn’t actually know the employees. We took on one client that had a sizeable chain of retail stores and a couple thousand employees across the country. And one payroll person in accounting who never took a vacation, supposedly because no one was trained to cover for her. We discovered that there were about a hundred “employees” on the payroll, and getting paid regularly for years, that didn’t exist. Paychecks were cashed and no one was the wiser until the arrival of Your CFO for Rent. Cost to the company was in the hundreds of thousands of dollars.

Example 2: This bookkeeper at a mid-sized manufacturing company had gotten approval to borrow money from the company, as an employee loan, as long as the loan was repaid. Apparently a series of personal issues led to repeated loans from the company to the same bookkeeper, all of which were repaid in due course. Or were they? Our fractional CFO was there when the employee, who also never took vacations, was off for a genuine medical reason. A question came up that caused the CFO to look through the employee’s desk for the answer to the question. Surprise! In the back of a desk drawer were a stack of checks made out to the company and signed by the employee, loan repayments that were never deposited into the company’s bank account. The bookkeeper was able to credit the loans and bury the actual cost elsewhere in the books, with no one the wiser if he hadn’t kept the actual checks in his desk.

Internal control is often seen as a nuisance by mid-sized and smaller companies with lean staffs in specialized areas like accounting, especially given today’s short-staffed employment environment. But it’s the little things that will get you, and sensible internal control policies is one of them. Firing an employee, or even prosecuting them, will not recover the money. Well thought out policies are intended to prevent the need for remedies by avoiding the disease in the first place.

Need a good internal control doctor? Give us a call.

We are Your CFO for Rent.

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