Jeff: The CFO's role in the M&A process. Whether or not you have a CFO, just understanding a CFO's perspective is important and you'll find out why. If you're a business owner looking for answers you've come to the right place.
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 the web's number one content source for small business owners committed to building a business for eventual sale. It's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value. With me on the line to discuss today's topic, CFO's role in the M&A process is Mr. Raz Silberman, currently president at American Century Life Insurance Co. of Texas and long-time specialist in corporate finance and corporate development. Raz Silberman, thank you so much for joining us today on Deal Talk. It's good to have you.
Raz: Thanks, Jeff. I appreciate that and I’m happy to be on the call.
Jeff: What I'd like to do to kind of set this up for our audience a little bit, you obviously now have your own business currently in the life insurance space but what I was wondering about though is more about your past experience as a CFO. You have a depth and breadth of experience that is really quite impressive. And I was wondering if we can just start this conversation by discussing a little bit about your background as it relates to M&A and your experience.
Raz: Sure. I was lucky enough to have different roles in the financial world as a CFO, starting actually as an auditor with one of the then big five, with PW. And then I was a CFO for a financial services firm. We also provided investment banking so I've seen the M&A process from that side as well. Then I spent three years with a very large defense contractor, L-3 Communications, and had financial roles with them. And L-3 actually grew mostly by doing M&A with smaller companies in the defense world. And then spend some time as a division CFO for a company called Amdocs which does software and telecom building systems. Very high growth rate there, very comfortable operation. And then before I acquired my own company I spent some time with the company in the grocery business that sold to grocery chains and gas stations. A lot of experience that I learned that with all those different industries there's still many common themes, if you do software, provide services, or manufacturing some gadgets.
Jeff: CFO's are a different breed of businessmen because very, very analytical and really a very, very key component of most large corporations. But many small businesses may not have chief financial officer. They rely heavily obviously on their accountants and their teams of managers and their bookkeepers and so forth. And of course the owner is usually very hands-on when it comes to the numbers - or should be. But in your experience and really in your estimation how critical is the CFO's role in the transitional process when it comes to M&A and how closely do you work with the team in order to make all the necessary changes to drive important growth?
Raz: I think the CFO role is critical and I know our listeners some have large enough businesses to afford a full-time CFO. But even if you can’t there's a bunch of services out there that you can hire people for like a day, or the hour for the project. And I think if you hire the right people it will certainly add value to your process. The way I look to the CFO role is almost like when you use a Google Maps, or Apple, or anyone's map on your phone the CFO can actually give you a lot of what the same map gives you. The financials are kind of the landscape if you like of your business. It tells you where you are, and how you do, and what results you get from your efforts. A good CFO would be able to tell you what this landscape looks like, like your map looks like. He or she will also be able to tell you where you are on this map. Are you very profitable, are you leverage, are you losing money, are you making money, are you efficient on your operations and all those good things. Also once you tell them where you want to be as a business owner, because at the end of the day it's not the CFO role to tell you where you want to be. If you're the business owner, you need to define where you want to be and different owners have different preferences. The CFO can tell you how to gather financially speaking and where you are along the way. That's the way I see this CFO role, and it's the same thing with the operations, and the same thing with the M&A process.
The way I look to the CFO role is almost like when you use a Google Maps, or Apple, or anyone's map on your phone the CFO can actually give you a lot of what the same map gives you. The financials are kind of the landscape if you like of your business. It tells you where you are, and how you do, and what results you get from your efforts.
Jeff: Raz Silberman is a specialist in the area of corporate finance and development. Did you ever in your experience, Raz, witness either from a third party's perspective or directly experience any kind of friction or disagreements that you might have had with the business owner as to where the company stood financially and any potential barriers to growth if it were to continue on a continuous, perilous trajectory?
Raz: Oh yeah, I have been there. When we go to school we learn that businesses are there to make money, grow profitably, and create wealth for people. Sometimes owners of businesses have other preferences. If it's growing the company versus giving work or security for a family member there can be a contradiction. Maybe what you want to do is to grow your top line because it makes you feel good and you get lot of awards if you're selling 100 million versus 50 million. There can be many different preferences. And sometimes the preferences are fun and you can grow your business with them and stay around. And sometimes they can lead you to a place where you almost get bankrupt and I've been in part of those situations and it's not a fun situation to be in. I think a CFO role is to basically tell people where they are. It's not that the CFO is making some crazy predictions on the future. Usually CFOs is by nature very reserved, very conservative, and they will tell you where you are. When my kids were three years old they would put their hands on their eyes and say no one sees me. I think that latest you can use this trick. As a business owner you just can't ignore those things, to me it’s irresponsible. And there are many ways to deal with them. It's not that CFOs are trying to tell CEOs what to do but at least listen to someone who's courageous enough that they lose their job because they're telling you where you are, and to tell you they think it's risky.
I think a CFO role is to basically tell people where they are. It's not that the CFO is making some crazy predictions on the future. Usually CFOs is by nature very reserved, very conservative, and they will tell you where you are.
Jeff: Raz Silberman, if you would kind of go back in your memory and maybe an instance where you met with a business owner of one of the companies that you were within the past. They wanted to sit down and have a conversation with you, whether this is an annual conversation you might have, or one where they came in and said, "We've got some things we need to look at here. We need to somehow jumpstart the value here. We need to improve our value position here at company XYZ, and we need to think a little bit differently or do some different things." Where did that conversation really start? How did you start having that conversation? And if you could, talk to us about maybe two or three key drivers for improving value in a company where you actually had to go in and have that conversation with the business owner in order to kind of get things started.
Raz: Sure. The basic principle is do more with what brings value and do less of what brings less value or subtract value. My approach was in quite a few situations is to take the business and break it down into either lines of business or products or customers, whatever way you can segment your business. And then do an analysis. Obviously the profitability but also the return on investment or return on equity that we get in each line of business. I'll give you an example. One company I worked for, we had three or four lines of business and some of them were very efficient in terms of capital in the sense that there were lots of vendor financing so maybe the margin of profit was lower but we hardly needed any capital to compete there. It was a great business. There were some other places where we put more money and more money, and kept losing money. That's not a very good way to create value. So we were sitting and just analyzing all of them, and just putting the situation in front of the CEO and the owner, and they make a decision where to put the money. Sometimes they would say, "I still want to put money in this way because I think it's losing money now but it has great potential." That's okay, but at least we knew where we were going. I think if you're a CFO, you have a business, and you want to show the owner how to add value just break it down, understand yourself where the business creates value. Value, obviously we mean is financial value. These other values that the CEO sees there, then you can take them into account. But in this analysis we talk about financial value and just figure out where the value and try to build this part of the business.
I think if you're a CFO, you have a business, and you want to show the owner how to add value just break it down, understand yourself where the business creates value. Value, obviously we mean is financial value. These other values that the CEO sees there, then you can take them into account. But in this analysis we talk about financial value and just figure out where the value and try to build this part of the business.
Jeff: Excellent feedback from Raz Silberman, and in just a couple of minutes Raz we're going to take a short break. I'd like to come back and I'd like to talk to you about strategic M&A, how to know whether or not an M&A deal, maybe working with a group of investors perhaps, either minority or majority ownership stake involved might be the best way to grow one's company. We're going to talk about that in just a moment.
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Jeff: Welcome back to Deal Talk. My name is Jeff Allen with my guest Raz Silberman, an expert in the area of M&A corporate finance and development. By the way, Raz is currently owner of his own business, president at American Century Life Insurance Company of Texas. We would like to once again thank him for joining us on the program today, very important discussion today indeed. A CFO"s perspective on M&A, how important a CFO is to any deal whether or not you actually have a chief financial officer in the fold at your organization. Raz touched on a little bit in fact in the first part of the program that there are ways that you can actually hire on, or bring somebody on temporarily, or perhaps on a contracted basis to assist you with your CFO-related needs. And particularly important I think when you are engaged in perhaps preparing your business for a transaction. And whether that means selling your business outright to a new acquirer, you've got suitors out there who are looking to take over and you're looking to transition out and execute that exit strategy that you have, or you're looking to build your business from a strategic standpoint. Raz, that's where I'd kind of like to jump off on this second half of Deal Talk today. Let's just say hypothetically that I'm interested in growing my company, what are the key decision points or key decision drivers, however you choose to look at it, that could help tip the balance in favor of pursuing an M&A deal that would bring on potentially new partners to help me run my business and grow my business that way? What are some important considerations that could actually make me choose to go that route?
Raz: To me the key thing in everything an owner does is what does the owner want and what is the owner preferences. If your preferences are more, "I want to grow this business. I want to create a substantial company. I may not own 100 percent but I know it's going to be a great business. I'll get to run it." That's a wonderful approach. Some people say, "I'd rather stay small and control everything from top to bottom, and that's how I want to live my life. There's nothing wrong with it but then obviously getting partners is probably not a good idea. Because partners come with some expectation on their side. Some want to have more control, some want to have complete control, some you have to report to someone what you're doing and you're going to get questions. And you're going to get questions on the people that work for you but people that basically see the value in the board, although you'd probably will be a part of the board.
I think the first question someone wants to ask them or even one step back, educate yourself what this process means. What does it take? What are the usual structures? You can talk to any M&A advisor and they will tell you what most investors want and what they want to see. And then you can form your opinion of what you want to do. I think that's where a CFO comes into the pictures very much because a lot of stuff in these little details. They sound little until they become relevant. A good CFO can show you that and explain to you what they mean. So you know what you’re getting into with open eyes and a clear mind.
Jeff: Okay. Let's go ahead and suppose then in fact that I've opted to go with the strategic approach of going to, sitting down, and doing a deal with a potential acquirer to drive my company's growth to help me expand my business. What in your opinion are some of the most common concerns that the buyer might need to address upon taking control of the organization potentially, assuming that the buyer does take the controlling interest.
Raz: I work for companies and we've got some external capital because there were stuff that we couldn't do on our own and it worked great. Everybody made money, everybody grew the business, and it was a great experience. I think that the biggest issue that I face is the different cultures between organizations. We assume we all run the business and we all run it more or less the same way. I found that it's usually not the case. Every company has the way they do stuff. Every company has their values. Some companies when they say, "We have a 9 o'clock meeting on Monday” if you're not there by 9 o'clock you would be out of the room and some slowly at 10 o'clock. Everybody has their own way of doing business, and their culture, and their own processes. I think the most important thing when you look at other organization is either how similar they are or how changeable they are if they're not. To me that's a key thing that owners should look at the business they buy. Before going into all the operational, financial stuff that all of these things could be taken care of.
Everybody has their own way of doing business, and their culture, and their own processes. I think the most important thing when you look at other organization is either how similar they are or how changeable they are if they're not. To me that's a key thing that owners should look at the business they buy. Before going into all the operational, financial stuff that all of these things could be taken care of.
Jeff: Have you ever seen or heard of the results of a situation where for example company A buys company B or takes over controlling interest and you had that cultural clash and the results that came about were quite damaging? How does a company deal with that sort of situation? Is it one of those types of things where you have to perhaps ask the outgoing owner to stay on board for a while so they can participate in the transitional process to smooth out that period where you can see those real differences where you need to work towards smoothing out those differences in order for those two new companies to get along together?
Raz: I have last worked for two large companies, both doing a lot of M&A, and without mentioning names one of them would buy the company, would leave it basically as a standalone unit and provide resources to help you grow, maybe contacts to new customers, maybe processes, maybe some systems, and they will oversee it but they let it run it on. And the president will remain the president, and very few people would leave. Another company I worked for once you'll be purchased, you be shoved into the system with new rules, with new compensations, with new everything, and what I've seen is most people would leave as soon as they could. I think it is important. I don't think in a smaller company you have the luxury of letting the other company you buy run alone. It's too small and you won't have the cost sharing or the cost savings you can get from combining operations. I think in this case that becomes even more important. I think the seller can help a lot because he has a lot of clout with his team and you can advise them and push them forward, changing something or making adjustments to join the new company. I think bringing those people on board and keeping them for a while is very important.
Jeff: As we start to wrap our conversation down a little bit here Raz, we've got just a few minutes left. In addition to the cultural differences in some of the problems that could come about as a result of those differences are there any other stage perhaps, or any other key factor that is important when you have the marriage of two companies? You've got a new organization. A particularly stressful part of that relationship in the early stages that requires a lot of patience and cooperation on the part of both sides in order to get through the tough times, in addition to the cultural differences that you talked about, anything else that stands out to you from your experience where there was a lot of patience and a lot of back and forth learning time required in cooperation in order to get through those tough times.
Raz: I think the key point from the buyer perspective is very quickly to create clarity on both sides. Mostly on the seller's team but obviously on the buyer's own team. And what I mean is that anytime there's an acquisition some roles will have to change, some people will come on board, some people will leave, some processing will change. Trying to be understanding and trying to find the average in a way in each process or each person and be fair to everybody may not be the best approach. I found that the sooner you have clarity overall; these people need to leave they should leave soon. If people need to be hired they should be hired soon. If changes need to be made, make them and then adjust along the way. But holding stuff back and trying to make things work where you really know they won't but you want to give it another chance just in case usually doesn't work well and you waste a lot of time and a lot of results of just dealing with those issues. And what I think it becomes in those situations you start to focus internally on the operations, on the roles, on politics if you want to call it, and you forget the customer on the other side. And very soon your competitors sweep in and take some of them away from you. So if you need to make changes make them right away. There's no benefit waiting and giving people another one month's salary or whatever just to delay those decisions.
Trying to be understanding and trying to find the average in a way in each process or each person and be fair to everybody may not be the best approach. I found that the sooner you have clarity overall; these people need to leave they should leave soon.
Jeff: Excellent point. The importance here is to be decisive. Make sure though that your decisions that you have to make are well conceived, well thought out, and then make those decisions, be decisive about it, make them quickly. Raz Silberman, as we're running out of time now I was wondering there are probably some listeners particularly in your area of Dallas Fort Worth area there in Texas who may be listening to this program and maybe thinking, "It's possible that Raz could probably help me with my business" or they may have some questions they'd like to possibly talk to you about their particular situation. How can they reach you?
Raz: Two ways, you can always call me. My direct line is 469-233-1790, or you can email me. My email is email@example.com.
Jeff: Very good. Raz Silberman, it's been a pleasure. This has been an enjoyable conversation and an important one, and I'd like to think that we can have you back on the program again.
Raz: Thank you, Jeff. I really appreciate it. I enjoyed being on the program.
Jeff: Raz Silberman, M&A specialist in corporate finance and development has been my guest today and I hope that you enjoyed this discussion. It was really an important one to have. And I'd like to hear from you by the way. We're interested to know your thoughts about this show, about a discussion with Raz, and about Deal Talk in general.
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