Financial Readiness Before the Deal

The chief financial officer (CFO) is often a very instrumental member of the sell-side team in any M&A deal, offering a level of foresight, insight and overall financial expertise that bookkeepers and accountants cannot match. But what if you don’t have a CFO on board? If you’re considering selling your business within the next three to five years, who can you turn to to help you devise and implement a plan to raise your company’s value? Rob Taylor has some suggestions. Currently the CFO with Accuform Signs, Mr. Taylor joins Jeff Allen to share his past experience as a CFO who helped prepare sell-side companies for successful M&A transactions. Gain insight into selling your company from a CFO’s perspective on this edition of “Deal Talk.”

Questions Answered For You

  • How does a company know what type of sale might be best for them — an asset-based or stock-based sale?
  • How involved are CFOs in the preparation of their companies for sale?
  • What is EBITDA, and why is it important for business owners to understand it when selling their companies?
  • What kind of documentation do you recommend that a seller have ready to provide to a buyer either now or at some point down the line when they're ready?

I used to play football back when I was in college, and I was a defensive lineman, and I really hate to say this, but CFOs really need to be the quarterback of the deal.

- Rob Taylor

Key Takeaways

  • The price you may pay to assemble a team to help with the sale of your business is worth it down the line, because you want to make sure you get the best after-tax return on the sale of your business.
  • Consider EBITDA before entering into any transaction.
  • Even if you don't have any thoughts of exiting your business any time soon, it's important to run your business as if you're preparing to.
  • Having audited financials as opposed to reviewed financials is essential. Reviewed financials don't have the same kind of credibility as audited financials with people who are looking to buy businesses.
  • Due Diligence is not just for buyers anymore.

Read Full Interview

Jeff: From our studio in Southern California, with guest experts from across the country and around the world, this is “Deal Talk,” brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.


Jeff: Welcome to “Deal Talk.” If you're looking to sell your company now or at some point in the future, it's our mission to provide information and advice from our growing list, and it is growing, huge, trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

Some small businesses are large enough to warrant having a chief financial officer on board. The CFO works side by side with the CEO and/or owner as a corporate financial watchdog with the best overall view of the company's financial status in real-time, on a daily basis. It's a huge benefit. So how instrumental might a CFO be during a corporate transaction and what can we learn from them about the process of preparing our businesses for sale? We're about to find out as we welcome Mr. Rob Taylor, senior financial executive and corporate officer, and, presently, chief financial officer with Accuform Signs, a $40 million family-owned manufacturing business in St. Petersburg, Florida. Rob Taylor, welcome to “Deal Talk.”

Rob: Thanks very much, Jeff, glad to be here.

Some small businesses are large enough to warrant having a chief financial officer on board. The CFO works side by side with the CEO and/or owner as a corporate financial watchdog with the best overall view of the company's financial status in real-time, on a daily basis.

Jeff: Rob, my intro I know didn't do you really proper justice when you get right down to it, because your LinkedIn profile really does spell it out quite nicely. But kind of in brief, can you give us a summary of your first-hand experience working with businesses in the M&A process if you would? Just kind of take a moment to tell us a little more about you.

Rob: Sure, absolutely. I've had the distinct pleasure of being acquired on at least three occasions by other companies that came in and purchased companies that I worked for, and also in my corporate duties back with ServiceMaster, I also worked at one of their divisions that was very active doing acquisitions. And that naturally led me to return to Ernst & Young and actually work on their transaction advisory services practice, where I worked on 14 deals in about two years. And so I've got a good flavor for looking at transactions on both sides of the equation, from the people that have been acquired to the people doing the acquisition. So I feel I've got a nice round background on everything in the acquisition space.

 

Jeff: I think that's a huge benefit to our “Deal Talk” listeners, Rob, quite honestly, being able to come at this subject from a couple of different viewpoints. So I appreciate your taking the time out of your responsibilities there at Accuform to talk to us a little bit today. For some reasons, some business owners decide that maybe seeking investors or buyers is not necessarily the way to go for them despite other obstacles in the way that prevent them from getting funding from traditional sources, maybe getting a bank loan or going to the Small Business Administration, for example. So the question is really to start the conversation here on this segment of “Deal Talk,” Rob Taylor. Why do some companies choose not to pursue acquisitions to help them build capital in their companies?

Rob: I think a lot of times, Jeff, it comes down to companies believing that they can continue to grow organically. Typically what I've seen is companies can grow organically up to a certain point and then things kind of plateau. At that point that's really the ideal time for a company to seek some investment and perhaps do an acquisition or just sell and start something new. And in terms of doing an acquisition as a buyer sometimes companies do not have enough cash to really do the purchase on their own, and so they're really reluctant to bring an investor to lose their ownership stake in the company, if you will. And sometimes it's just simply companies being afraid of change and they don't want to introduce another culture into their company and try to work with that culture and do it. And it can be very exciting, but it can also be kind of scary to see your baby kind of morph into something that you may not feel you'll get 100% control of.

Typically what I've seen is companies can grow organically up to a certain point and then things kind of plateau. At that point that's really the ideal time for a company to seek some investment and perhaps do an acquisition or just sell and start something new

Jeff: I can certainly understand that. And really when you take and put it that way it kind of takes and makes it more real, because so many of us are so close to our businesses it's like an extension of ourselves really. Let's take a step forward a little bit and let's suppose that a business owner is considering moving forward, but he or she does not exactly know which route to take. So how does a company know what type of sale might be best for them, whether it be asset-based or stock-based sale? What are the implications of each if you can kind of break both of those down for us?

Rob: Yeah. On a really high level I think the really way to look at it is to say an asset-based sale you sell the assets of the company. You don't sell any of the liabilities. So the purchaser basically acquires all the assets, goes forward with those, and doesn't take on any of the liabilities. Sometimes from a buyer's perspective that's a little bit more attractive, and from a seller's perspective, however, you get left with some of the liabilities there in your business. This is a crucial decision when you're making the decision to acquire business or to sell your business. So you really need to get what's really, really solid, good accounting, and tax advisory, whether that's through an attorney or a CPA firm. But the wrong decision here can really end up costing you a lot of money in terms of excess taxes that you may have to pay if that deal was structured in a different way. Before you launch down, putting your company up for sale, you really want to get that advice upfront and know which way you're going to go.

 

Jeff: I think that's a really, really important key point to remember, Rob, as far as assembling a team, even if it's for the purpose of helping you make a decision. The price you may pay to assemble that team or to at least consult with individuals may be a little bit more than you want to pay, but at the same time it's really a price that could save you a ton of money down the line, isn't it?

Rob: Absolutely. You want to make sure that you get the best after-tax return on the sale of your business. And if you don't plan it out appropriately, you may end up not netting what you thought you were going to net, and then that ends up leaving a bad taste in everyone's mouth, both the acquirer and the acquired company.

You want to make sure that you get the best after-tax return on the sale of your business. And if you don't plan it out appropriately, you may end up not netting what you thought you were going to net, and then that ends up leaving a bad taste in everyone's mouth, both the acquirer and the acquired company.

Jeff: Rob Taylor is my guest. He is chief financial officer of a company called Accuform Signs, and they're a very successful family-owned business. They manufacture safety signage, I think, there in St. Petersburg. Is that right, safety signs?

Rob: That's correct.

 

Jeff: And a $40 million family-owned manufacturing business there for many, many years. Rob playing a critical part of that success. How involved are CFOs, Rob, in the preparation of their companies for sale? What about other C-level executives as well?

Rob: I used to play football back when I was in college, and I was a defensive lineman, and I really hate to say this, but CFOs really need to be the quarterback of the deal. Certainly as a defensive line I didn't have a lot of respect for opposing quarterbacks, but it's really up to the CFO to kind of be in that position and direct a lot of resources for the company. It's going to take a team. You need to get your chief human resource officer, if you have one, involved because integrating through companies can be very difficult from an HR perspective, and bringing in different cultures, etc. and so on. And it's really important that you do that team. You're going to need a chief legal officer, if you've got one, to review contracts, deal structure, things that may be coming up. And you're going to need the CEO, who's really kind of the face of the transaction, but they're not going to be the ones that are working through the nuts and bolts of the detail. So you need to really assemble a good team around yourself and know that it's pretty much going to occupy the majority of your time during the due diligence and transaction process because it's not an easy or work process to go through.

 

Jeff: Let me ask you a question. I know that there are a lot of smaller businesses out there that maybe are not structured such that they actually have their own chief financial officers on board, they may have a great accounting staff there and a CPA of course working hand in hand with the CEO. But have you ever heard of, or would you recommend, Rob, a company hiring a temporary or even part-time CFO just to oversee things with the owner to make sure that things run smoothly, and to help them in that transaction process?

Rob: Absolutely. There are several companies out there that do what we kind of call fractional CFO services, where they'll come into your business for a couple of days a week or a couple of days a month, or a few hours a day, however often you need them. And they can kind of set the course for you and help you understand what's going on with your business and particularly when you're considering doing a transaction. You want to bring that person in early. Maybe give them kind of a year or so under their belt to really understand the business and to be able to position it best going forward, because at the end of the day, it all becomes about the numbers, and you want to have someone who can answer all the questions about the numbers intelligently and convincingly and know what they're talking about. So that's where even a part-time CFO can be extremely helpful.

 

Jeff: Terminology time-out here on “Deal Talk,” M&A one-on-one. EBITDA, you hear that term thrown around on this show from time to time, but for people who may be listening to “Deal Talk” for the first time, and maybe they're even business owners themselves or entrepreneurs and they're not necessarily up to speed on all of the lingo that is involved. What is EBITDA, and why is it particularly important for business owners to understand when it comes time to sell their companies?

Rob: Sure, absolutely. EBITDA officially stands for Earnings Before Interest Taxes Depreciation and Amortization. And really what it is, it's kind of a simplistic back-of-the-envelope calculation, if you will, of cash flow before taxes and financing. And the reason we take out interest in taxes is because a new owner will have a much different financing structure than the seller might have in place and will also have a very different tax structure. So they need to apply their financing and tax structure to the acquisition to see how much cash flow they need to get out of the acquisition. So taking out the seller's position in those taxes and interest will let you create kind of the common starting point. And a lot of companies and a lot of CEOs and people really believe that the business is sold on the basis of revenue. They keep wanting to drive top line, drive top line, drive top line. At the end of the day, it sells on what you put in your pocket at the end, so we're selling on EBITDA. In a simplistic way, $100 million business generating $5 million in EBITDA is actually worth about half as much as a $50 million company generating $10 million in EBITDA. What people want is what they're going to have at the end of the day, so we'd like to focus on that number and really focus all of your business decisions on how to maximize EBITDA to maximize your sale price if you're going to be looking to exit your business. And I was at a recent venture capital forum, and one of the people speaking there had a great term and he called it ABE, Always Be Exiting. So what he was basically saying was that you need to take a look at your business, and whatever you do, think about how that's going to drive the evaluation of your business before you enter into that transaction. And if it's going to increase your EBITDA and increase your value, do it. If it's not, then maybe you need to think twice about making that decision.

EBITDA officially stands for Earnings Before Interest Taxes Depreciation and Amortization. And really what it is, it's kind of a simplistic back-of-the-envelope calculation, if you will, of cash flow before taxes and financing.

Jeff: Interesting point. Even if you don't have any thoughts of exiting your business any time soon, it's important, I think, according to what Rob is saying, to run your business as if you're preparing to sell even if you have no thoughts about ending your time with your company any time soon in moving on but you want to run your business that way. So that that way when the time comes, obviously you're going to be more prepared and you're going to be able to get the best value that you possibly can for your company. I'm Jeff Allen, and we're talking with Rob Taylor. And Rob Taylor is an expert in the area of corporate finance. He's a senior financial executive and CFO currently at Accuform Signs in St. Petersburg, Florida, and we're talking about things you need to remember when you're preparing to sell your business. And even if you're not going to be selling your business anytime soon, these are things that you need to write down, you need to remember, you need to give some thought to, and maybe do your own additional research outside of this program. And we're going to continue our conversation with Rob Taylor when “Deal Talk” continues right after this.

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Jeff: I'm Jeff Allen with my guest Rob Taylor, a senior financial executive and corporate officer. Mr. Taylor is the CFO for Accuform Signs in St. Petersburg, Florida. And he has an interesting perspective on the business sales process. Mr. Taylor, of course, spending time with Ernst & Young, and he was in their transactions division and spent a significant amount of time with them, a significant experience on the buy side helping companies perform due diligence, and also too on the sell side as well. And too now as CFO he has kind of an interesting perspective there as well working internally with a company that is very successful indeed in the manufacturing process there in St. Petersburg, Florida. Rob, getting back into the conversation, kind of helping business owners determine what's really important to help them prepare to sell their companies even if they're not ready to do that right away. What kind of documentation do you recommend that a seller have ready to provide a buyer either now or at some point down the line when they're ready?

Rob: I would say the first place you need to start is having audited financials. A lot of business owners, especially small business owners, are happy to pay a little bit less to their CPA firm and just get what are called reviewed financials. Those financials don't have the same kind of credibility with people that are looking to buy businesses. They want to see that auto opinion on the cover, and they'd like to see it from one of the larger accounting firms. You don't need to go big four, but you should at least go to one of the larger regional firms. It makes the buyer feel more comfortable that the numbers reflected in there are accurate rather than just something that you had thrown together at the last minute. And well-reviewed statements are OK. They're certainly not as closely scrutinized as audited financials are.

So you're going to want to have at least three years of those audited financials, because most deals are kind of valued on an average three-year EBITDA basis, or buyers want to know that they can take the financials that they're presented at face value.

I would say the first place you need to start is having audited financials. A lot of business owners, especially small business owners, are happy to pay a little bit less to their CPA firm and just get what are called reviewed financials. Those financials don't have the same kind of credibility with people that are looking to buy businesses. 

Jeff: Are there any other documents that may be important in the process of selling one’s own business rather than just financials that you're talking about, or in addition to those financials?

Rob: When you get into due diligence, you're certainly going to want to provide your tax returns, and that would be specifically important if you've taken any aggressive tax filing positions with the IRS. Or if you're doing stock sales, there's a lot of information in the tax returns that the buyer's going to need to know. You're also going to want to see any material contracts that you've got with customers, or suppliers, or things like that, leases. No one wants to buy a company assuming that they can continue to lease the space they're in and then suddenly find out at the last minute of due diligence that their lease ends in six months, so you're going to have to find new space, because that could completely change the outlook of the deal in terms of what they're going to be paying going forward. Any kind of significant contracts like that you want to have them available. And when it comes to due diligence, you want to just be able to hand them over and say, "Here you go, review it," rather than having to scramble around in your office and go through filing cabinets and find those significant agreements.

 

Jeff: What about documentation for such things as add backs and so forth?

Rob: Absolutely. I mentioned that there were companies just sold on EBITDA, to be honest, it's actually adjusted EBITDA. And kind of what we do with adjusted EBITDA is we back out things that are one-time items, or things that are not related to the ongoing business. For example, you may have acquired a new customer or you may have lost a new customer. So you're going to adjust the EBITDA that you present to the buyer as if you had that customer for that whole three-year period that you're going to bring in. You suddenly see a lot of growth minutes because there is a new customer. You want to get credit for that going all the way back for the three years, so you'll calculate there's some kind of an adjustment and be able to say, "We now have this big customer. If we had them three years ago our financials would be significantly higher,” and have all the documentation for those so that you can easily show that the numbers you're presenting are valid and accurate. And likewise, if you've got any one-time expenses, there was a lawsuit, there was something bad happened, there was a natural disaster that affected your plan, you're going to want to take those costs out of your EBITDA calculation so that it looks apples to apples in what the buyer of the business can expect to get going forward.

 

Jeff: Rob, if you could kind of share with me, as a small business owner myself, I don't have the kind of company, or the staff, or the need for a chief financial officer. And at the same time I'm just kind of thinking hypothetically now, and looking at this down the line, as someone who might have an interest in selling his business down the line. I just spend a lot of time in my business working in it and on it at the same time and I know that there's a lot of stuff out there that you need. You talked about audited financials and you talk about all the documentations necessary. Who am I really going to be able rely on on my team to help me out with this? I've got a pretty good account and I've got a bookkeeper who can help me with this. Is there anything else that I can do or anybody else that I can look to to kind of help me make sure that I'm providing everything that I need, either a business broker, or to the potential buyer of my company, those people who need this stuff in order to make sure that I'm giving them all the information that they need in order to make a good decision?

Rob: Yeah. I think there's lots of companies out there and lots of individuals out there that have worked on a lot of acquisitions and sales, and you can always find them somewhere, that you're one of the largest CPA firms, it's not something that a sole practitioner likely is going to do. But if you kind of go up to some larger firms they usually have some people that can provide you with some good advice and can help getting to know your business. And as I mentioned earlier, you can also bring in kind of the part-time, temporary CFO to come in a couple of days a week and take a look at things and direct you as to what you should be looking at, maybe you should be thinking about things. And particularly if you're considering an exit coming up in the next couple of years. Because essentially it comes down to telling a story. Everyone loves a good story, and you want to be able to show to the financials, that your story is holding true and you're showing consistent growth. And I have a tremendous amount of respect for bookkeepers. What they do day in and day out is tough work. But at the end of the day, they just want to make sure that they record the transactions correctly and are not so much concerned about the story. And it's helpful to kind of craft that story going into the sale.

 

Jeff: Rob, let me ask you a question that I don't think we've ever really talked about here on “Deal Talk” on another segment up until now. But does it make any sense if you've got a business owner who was thinking about selling his or her company down the line, their company is largely successful. But they're interested in bringing the value of their company up. Do you think it might make any sense for a business owner to maybe get together with certain managers that they have on their team, maybe if not all of them, and maybe come up with ways to reorganize the company or get themselves in shape to better understand how they might be able to improve productivity and do certain things with the team that they have already on board without going through a lot of major expense in order to help them bring that value up in the years leading up to their eventual sale? If they have kind of an objective in mind of maybe three or five years down the line.

Rob: Absolutely. You want to make sure that you engage your team. And ideally if you can engage your senior leadership team and let them know that you're considering selling the business in three to five years and we need to work very efficiently and very profitably. And we need to show as much efficiency as we can and get everybody on board on the same team. It really helps as well if some business owners are willing to share a portion of the deal with the people that are going to help them really drive the value up. But you want to show that you're operating at peak efficiency. You always want to sell your business, just kind of at the upside, very close to the peak. You don't want to sell it too early and you certainly don't want to sell it too late if it should happen to start. Maybe slipping a little bit and you're not seeing the profitability you've seen in previous years because then your story as well, we've kind of peaked and now we're going down, and buyers aren't willing to pay as much for companies that they're going to have to come in and do a lot of work on. They want to come in, they want to buy a company that they can just step into and know that it's going to continue to grow without them investing a lot of time, effort and money in turning around a business that's perhaps not performing as well as it once did. So it's always important to focus on those efficiencies and make sure that your story is kind of an up into the right as we say, story on a graph, rather than a down to the right story.

You want to make sure that you engage your team. And ideally if you can engage your senior leadership team and let them know that you're considering selling the business in three to five years and we need to work very efficiently and very profitably. 

Jeff: Basically, what we're talking about when we're talking about collecting all those financials, and audited financials, and going through and collecting all that documentation, that's part of the due diligence process. There's some due diligence involved in that and it's part of the overall process. And seller due diligence is something that we've kind of learned is relatively new over the last 15-20 years. The buyer has always had to do their part whenever they've gone out to kick the tires of a company prior to sitting down at the negotiation table, Rob Taylor. It's not enough to simply provide quality of earnings reports any more, is it?

Rob: Correct. The quality of earnings reports are typically done by a buyer looking to a buy a business, and they will sometimes engage a firm like Ernst & Young, or many other firms that do this. We will go in and kick the tires and come up with our reports that are kind of called quality of earnings. If you can do that ahead of time first you can have some tremendous advantages. You make sure you don't miss anything. Due diligence is always crazy times. I remember sometimes arriving back at hotels after the newspaper had been delivered in the morning, getting an hour of sleep and getting up and going back to work. So you don't have a lot of time, typically you're restricted for the amount of time you can be at a company. And if you miss something and the seller's people doing due diligence find it, you're not going to get paid for that. If someone notices that, "Hey, guess what? They picked up this new customer this year. There's only six months’ worth of sales in the most recent year we're basing this deal on an average three years EBITDA, this should really be higher.” We could project that out to be a much higher thing. The buyer's due diligence team is not going to tell the seller, "Hey, you could get more money for this.” They're working for the buyer. So you want to spend some time first, you want to go through, you want to identify your ad backs, you want to make sure you have your documentation all in a row so that that way you can present it to the purchaser and say, "Look, this is what we've got. Here's our support for it," kind of any questions. And that way you will be fully on top of everything that they can come up with. You'll dig all the skeletons out of the closet beforehand so you'll have an answer for it, because as the buyer due diligence team looks at it and find things that say, "We're not sure we'll really buy this." It's good to put yourself through that process first so that you can address the buyer's concerns early, and then they're going to walk away being a lot happier and a lot more willing to do the deal.

 

Jeff: As we come up on the end of this particular edition of “Deal Talk,” Rob Taylor, some “Deal Talk” takeaways now. If you've got just 30 seconds to tell people what they need to remember to do as they're preparing to sell their business or thinking about it, what would you say to them?

Rob: I would say overall prepare. Prepare to sell your business. Take the time, and the effort, and the investment into making sure that you got your story straight, the story hangs together, and that you've identified everything in your financials that the buyer may throw back in your face. And that you've identified all of the items that you can get paid for, and that they're in there so that you can get the maximum value for your company.

 

Jeff: Rob Taylor, if someone would like to reach out to you. If they've got any questions that are specific maybe to their company, or even some general questions at all that you might be able to help them with, or if they need to talk to you about some signs there at Accuform and maybe you can put them through to the right people over there in the sales department, how can they reach you?

Rob: They can reach me at my email address, and that's robtaylor065@gmail.com, or they can call me on my cellphone, which is 727-286-1441.

 

Jeff: Great chat today, Rob Taylor. I want to thank you so much for joining us on “Deal Talk,” it's been a pleasure.

Rob: Thank you, Jeff, I enjoyed it.

Jeff: Rob Taylor, chief financial officer at Accuform Signs has been my guest. We hope you enjoyed the chat today. And to listen to more “Deal Talk,” including this particular episode, visit morganandwestfield.com, click on the podcast link at the top of the site. We're also available on iTunes as well.

“Deal Talk” is presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. Find out how Morgan & Westfield can help you at morganandwestfield.com. For everyone at “Deal Talk,” I'm Jeff Allen. Thanks for listening, and I'll talk to you again.

While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.

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