Quarterbacking Your Next Deal: What CFOs Need to Know

FEI Daily spoke to Fentress Seagroves, Deals Partner at PwC, to discuss what CFOs need to know about today’s deal market. Seagroves explained that the deal market will continue to favor sellers, even if an economic downturn occurs – due to the overabundance of capital and a scarcity of attractive investment targets.

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FEI Daily: There’s a lot of uncertainty hanging over today’s deal environment, how will that impact deal activity moving forward? 

Fentress Seagroves: There’s an unprecedented amount of capital available in the marketplace in private equity or on the sidelines looking for investment opportunities. That is going to be the case even if we have a slowing – there’s a lot of money trying to find a home. So, that is going to keep demand for quality companies looking for an exit at a high level. I think that is a favorable environment for sellers – families or other business owners looking for an exit.

It won’t have a big impact on the financial executive. Whether the market is frothy or tighter, the level of preparation, discipline, and time needed to run a successful transaction is the same. There’s always going to be money, so it will keep the activity strong.

FEI Daily: So, it’s a seller’s market? 

Seagroves: There may be people who choose to sit on the sidelines until the market gains momentum or conditions improve, but the money is going to be there for deals. Even if the market slows, it will remain a sellers’ market; because, there aren’t enough good businesses to match up with the amount of capital in private equity and on corporate balance sheets. Investors need alternatives beside the public markets. So, you see people chasing deals in other kinds of investment vehicles. If I’m a financial executive, its pretty cool. The capital isn’t only there to sell your business to a private equity group – it’s there to take advantage of growth opportunities. There are partners ready and willing to team. That’s an exciting prospect if you are a CEO or CFO trying to supercharge and grow your business.

FEI Daily: What are the indicators that a financial executive needs to start considering a sale? 

Seagroves: There are a lot of reasons why a business owner wants to consider exiting. It might be that they don’t have the ability to pass it down to the next generation. They might find that they’re that it is the perfect time to cash out – from a value optimization perspective. Sometimes, there are opportunities to merge, and those will come with specific types of buyers.

When I think of an owner exiting, I think “Do I have a plan for succession, do I have a management team ready to run the business, is the market ready, do I have the business ready to go, do I have optionality in the marketplace?” That is the proactive way.

Any of the following represent triggers:

  • death of an owner;
  • catastrophic change in the business;
  • unexpected problems with customer or supply chain;
  • industry changes; or
  • technology changes.

FEI Daily: At what stage do business owners need to bring in advisors? 

Seagroves: You’ve got to bring in advisors to give you the support that you need in the natural process of selling the business; whether it be in the form of legal, accounting, environmental or investment banking. An owner needs to surround themselves with confidants; they can be internal (one or two key executives), family members, a lawyer, an investment banker, or a board member in the early stages of business planning. Having those confidants help make the discussion around exit strategies a more ongoing part of the planning process. Each year, you think “one day, I’m going to exit this business.” You don’t want to wait for that day to happen before you start planning.

Owners who seek advice and get good input from advisors earlier rather than later (even if its removed from your starting point) benefit dramatically from that insight, shared experiences, and from sounding boards. You need to be careful – you don’t want to signal to the market or your company that you are selling, but you should be able have confidants and advisors who can help you think through the process of the exit.

FEI Daily: Out of the three most common buyers (pureplays, vertical integration, or PE/VCs), in which scenarios might one deal partner be preferable to another?

Seagroves: It typically comes down to the seller’s strategy. These days, there is a focus on maximizing proceeds, especially when working with strategic buyers (pureplays and vertical integration). In contrast, private equity buyers may look at the business as a platform investment. They come in, and in some cases, want to retain and empower management to go out and improve the business through targeting vertical integration opportunities or other pureplays. They may want to create an anchor investment and allow for the owner to cash out (or partially cash out) and retain them as a management. Private equity groups are typically looking for strong operational or financial management. CFOs and controllers (operational or financial) can do well working with a new private equity owner to help run the business through acquisition.

There is an important difference between a vertical integrator and a pureplay. A vertical integrator might purchase the business with the intention of retaining the target’s management team. Where a strategic pureplay is looking to capture efficiencies, a vertical integrator might decide to own their supply, and decide to keep their owner. Still, they are a strategic buyer where you are a part of the business. In a private equity deal, you as the target could become the pureplay acquirer or vertical integrator.

The three categories blend today. In the old days, private equity was really a financial buyer and strategic buyers were strictly strategic. There was a clearer line of delineation. Nowadays, there is so much money out there and so much private equity owned businesses that you may get involved with a pureplay or vertical integrator that is owned by private equity, who may bring a different perspective of ownership to the table than a strategic buyer, which is owned by a family.

FEI Daily: When preparing for a sale, how do financial executives tell their business’ story? 

Seagroves: History is the underpinning of my confidence in the future. The CFO has a difficult job, when it comes time to sell the business and tell that story. The CFO has their day job, which is hard enough. As much as I coach them on telling their story and selling the business, I remind them to continue running the business like they are not going to sell. They need to be constantly focused on running and growing the business; because, that gives you optionality. These sales take three to nine months, and if you don’t deliver – they will lose confidence in your ability to tell the story. If you keep performing and you decide that you don’t want to sell (e.g., deal terms aren’t right), you have optionality. I want to make sure that while we focus on telling the story, that management teams understand that the most important thing is for them to run the business and hitting targets.

In framing the story, you need to build through a discussion of financials and link to the operational, strategic, and current issues – so they all weave together. Telling your story means ensuring that your history is clear, that there’s an explanation of what the plan was and what you achieved – and even what you might not have achieved and why; this links to financial reporting metrics that you can track, show, and share with a buyer so they have confidence.

Telling the story going forward, it is bringing how the business has been successful in the past and where the it is going in the future. Where are we going strategically? What are the businesses capabilities? What are the competitive advantages? How will the business compete? How can they take the assets (e.g., human capital, management, manufacturing facilities, intellectual property, and processes.)? How do they take what is proven and project it moving forward?

Each step of the way, financial executives have to link it to pieces of data that the buyer can see and have confidence in the projections.

The story is what has happened in the past (you have data on that) and telling that on a level beyond the financial level. CFOs are like quarterbacks – they may primarily be focused on the financial reporting piece, but they are also the link to everything that happens operationally. The strategic plan has to have an anchor with the CFO; the CFO has to be a strategically linked executive. They are playing a multifaceted role in telling the story – they tie it all together and provide the proof. Buyers are going to invest in their confidence in the future, not the cash flows from two years ago. What you can do to tell the story that builds confidence things are going to happen and be achievable based on your history is the best way to frame your story.

FEI Daily: Concluding thoughts? 

Seagroves: When should I sell? I get that question all the time. The perfect answer is “when all the stars align.” That time when you can get the most money, when you can the most out of the life that you want post deal. I would love to answer people, “at the perfect time,” but there are so many things that matter. And, it’s not just when the market is good. My answer is, when you are prepared, you can answer that question with a lot more flexibility than when you aren’t.

The most challenging calls I get are when that patriarch or matriarch who runs the family business passes away and they aren’t prepared. That’s what is challenging. Then the family is left with this scramble to sell the business. I also get those calls when a marketplace-changing event occurs, and owners are left trying to figure out how to respond.

The best companies can’t predict the future, but they are prepared for the future. They prepare their business, they are constantly thinking about it; they think about an exit strategy – just like they think about their business strategy.