A CFO’s Perspective on Exit Readiness

As deal volume begins to recover and business leaders look forward to a falling rate environment, exit preparedness should be top of mind for finance leaders and dealmakers alike. Tom Pierce, managing director of the CFO advisory services arm of Consero Global, joins the podcast to offer a CFO’s point of view on the most important elements to consider ahead of a sale and how to kick off an exit preparation process.

This episode is brought to you by Consero Global, a leading FaaS (Finance as a Service) provider. This is part one in a three-part series about exit preparedness. Read a transcript of the podcast below.

Middle Market Growth: Welcome to the Middle Market Growth Conversations podcast, I’m Katie Maloney, vice president of ACG Media. Today we’re sitting down with Tom Pierce, managing director with Consero, to talk about a very timely topic which is exit strategies and why they’re so crucial right now. This is the first installment of what will be a three-part conversation about exit readiness, with parts two and three to come in the next few months. Tom, welcome to the podcast.

Tom Pierce: Thank you, Katie.

MMG: So, Tom, to kick us off, do you mind telling us a little bit about your background and about Consero?

TP: Yeah, Katie, and thanks again for having me. Well, my name’s Tom Pierce, and I’m the managing director of the CFO advisory services at Consero. Advisory services is the services portion to the main product of Consero, which is the FaaS (finance as a a service) outsourcing. I guess I’ve been a serial CFO now for into my second decade, predominantly in tech and technology-enabled businesses along with some media and healthcare as well. I’ve completed over 130 transactions totaling over $4.3 billion, both as a CorpDev exec, a sell side and a buy side investment banker, as well as, again, here into my 12th or 13th year, as a CFO, overseeing a number of buy side and sell side transactions. The last transaction I led was at Payveris, where I was the CFO. We were a fintech and we were growing at about a 50% annual rate. As I might touch on here later in the podcast, we had gotten exit-ready. We were ready, and lo and behold, Accel KKR in a meeting with myself and my CEO put an acquisition offer in front of us. We had our data room together, we’d done a lot of the advance preparation and we closed that transaction in less than seven weeks to be acquired by a public company.

About Consero itself: Consero was founded in 2006 and with the stated goal of providing a modern alternative to the in-house finance function. What does that mean? Well, really, instead of hiring AR people and an AP clerk and GL accountants, having your cloud software out there for your GL and your AP and your AR and other technologies—rather than hiring these people, training, retaining, and maintaining your systems, you can outsource all of it on a SaaS basis to Consero. One of the really compelling, attractive—the reason we have over 300 clients, 80% of which are PE-backed, is we can get a company live on our platform in 60 to 90 days and we also save a company money in so doing. So rather than hiring an AR clerk, an AP clerk and GL, rather than paying people to do that, we just provide you clean financials. We show your AP, we get your AR and we’ve reported it all in one simple platform—it’s proprietary, it’s called Simple—that provides a leadership team with a simple dashboard. Part of the reason that I came here, Katie, is as a CFO, people don’t want to hire employees to do finance and accounting work, they want clean financials. In the same way, think about the old Harvard Business School case: People don’t want to buy a drill, they want holes in the wall. Well, we do all of that and we save a company money at the same time.

MMG: Wonderful, thank you for that background, Tom. Thinking about where we sit today in August, why would you say now is such a crucial time to be raising the topic of exit readiness?

TP: You know, that’s a great question and I hear more and more about this. If we look back, March of 2020, the U.S. Federal Reserve started the historic zero interest rate policy—or ZIRP—started March of ’20 and ran through March of 2022. It let loose a deluge of activity. We know as well that if, say, a private equity firm or other acquirer is borrowing to make an acquisition, whether it be strategic or financial, the costs go down. We know as well that volume was probably about 3x in March of 2022 versus where it is now. So as we see that we’ve been in a very restrictive, indeed, this has been the most from March of 2022 until present day, it’s been the most aggressive Fed rate increase in our lifetimes. We know as well there is a lot of pent-up demand. The IPO window is closed, borrowing costs are high. Heck, everybody sees mortgage interest rates right now are sky high as well. I think right now, especially with current market volatility, that a Fed rate easing in September, as well as subsequent easing cycles to come in the months to come, is a downright certainty. We know as well with this restrictive environment that there is pent-up demand. So the IPO window will be opening and certainly the M&A market is going to be wide open. Whether that’s Q4 or January of 2025, we don’t know. We just know the window is opening. And as a result, coming to think about, now what happens? Am I ready for an inbound offer?

MMG: And knowing that that pent-up demand is going to emerge at some point—like you said, we’re not sure when but at some point we’ll see deal volume increase—how should companies be thinking about exit preparedness? And how early should that process begin?

TP: You know, CFOs have a lot of ground to cover, but realistically, that should start right away—ideally, day one. And if we think about what the role of a CFO is, it’s not getting financials out on time, it’s not maximizing or optimizing, say, borrowing costs. It really is being the steward of shareholder value. That’s not necessarily the view held by everyone. It depends also on the makeup of an executive team. But theoretically, a CFO should be thinking about, what is the value of my business January 1 and at the end of that year, December 31, if its value was X, it’s X plus what, how much more valuable did our business become? At the end of the day here, that really is the mandate for most CFOs, really being a guardian of shareholder value and making that the case, that being the point, so it should always be on the radar. Begin with the end in mind. What is your Polaris, your north star? And think about a date-specific end point against which you will lead the business and drive your enterprise toward some planned sale date. This could be three months or three years in the future. And if you plan multiple years out and no one knows when an inbound offer from a financial or a strategic buyer or someone else could show up, but you know that it’s going to happen. If you are the CFO of a PE-owned business and a transaction is going, it’s going to happen. That’s why they invested. So be ready—it’s going to happen.

MMG: So Tom, what are some of the major elements that a CFO and the executive team should prioritize ahead of a sale?

TP: Great question, Katie. And again, this comes back to being a steward of value for your shareholders and your board. And really there’s many different elements of it, but I think about it [as], what are the drivers of your enterprise valuation? Your financials and KPIs, what shape are they in? And what have you done to prepare and make sure they’re actually ready for prime time? Looking at customers and sales contracts, are you ready in that area? And then the other areas to think about as well: HR, legal review, advisory team, data room, etc. Let me double-click those just for a moment. Exit preparedness and say the drivers of enterprise value: Have you gone through and identified potential critical risk factors and have you cured these potential tumors? For instance, if you’re in the healthcare arena and your company must remain HIPAA compliant, have you done so? Have you hired a forensic analyst to diligence your company as if you were a buyer? They will come in with an unsullied eye to find these problems, these tumors if you will, and to treat these problems before you go to market. Taxes: Are there any unpaid tax liabilities working within your business? This is a multifaceted question, but you can guarantee that if any buyer will come in, they’ll understand all the liabilities they’re buying. If you have unpaid taxes, they’re going to find that out. But arguably, are you overpaying taxes? I’ve seen two instances where that’s the case and that affects your cash flow.

Moving on to financials and KPIs, key performance indicators, it’s expected you should have audited, clean financials. And I don’t see as much of this, I’ve done this in multiple transactions, but have you conducted on your side a sell side quality of earnings report? Meaning to say, have you brought in an outside advisor to diligence your financial statements and do an analysis of the quality of your earnings and understand if there are any challenges in there? Any buyer will of course, if you are overstating your earnings, they will find that, but if you’re understating that, that’s value leakage and you lose value in a transaction. If you’re in a subscription business, do you have a clean recurring revenue file? Is it auditable? Can you tie back to source documents? Again, this is much of the cash flow of a business. Key metrics: Do you have those locked down in your business? And lastly, current-year forecast and a three-year outlook: Do you do a long-range outlook? Do you maintain an annual forecast? It’s vital in a sales process. Thinking beyond that, exit preparedness for customers and sales contracts. Your customer base, have you diligenced your sales contracts? What does your sales pipeline look like? Some people might say, well, this could be the responsibility of the CRO or the head of sales or some other officer there, but at the end of the day, these are the major pillars of the valuation of your business.

Example: If you have loss or customer churn, when you lose these, are you tracking the reason why you’ve lost them? Was it unavoidable, if a major client, say, who went through a bankruptcy or was acquired and they ceased needing your service or product? Or was it avoidable? It’s important to track and make these auditable because any buyer is going to know all about this. Additionally, about customers, who are the champions of your business? Who are the great references? Who are the detractors, however, and what would they say? Any buyer, before they complete an acquisition or a transaction, they’re going to want to talk to your customers. Understand who you’d want to put forth as your great references. And think of beyond just financial—a CFO is not just about dollars and cents and debits and credits, but really overseeing the other areas that are the value drivers of the business, human resources and key contributors. While patents, a large diverse customer base, proprietary technology, these are all vital elements for a growing and thriving business. But the reason the company or how the company got there in most cases is going to be key employees. They are the geese who lay the golden eggs. They are the source to keeping customers happy and generating more revenue. Are they locked in place? As someone who’s completed dozens of acquisitions, loss of personnel is a critical element to think about. So do you have your noncompete documents in place? Have your locked your critical people in place with retention agreements? This is going to be vital before you can close a transaction.

Thinking about legal review, most CFOs—not all, but most—who are in a company that’s being sold, oftentimes they will come into a business after that business is somewhat mature. You have many documents, you have articles of incorporation, you have sales contracts, you have other items out there as well. We know there’s many, many contracts and legal requirements that we look at as CFOs. But if you’ve come into a business, have you undertaken—you probably engage legal counsel to do this—an analysis, say, of all your sales contracts for instance? Do you have any concerns out there that allow a customer, that would require them to approve a transfer of a contract in a sale? What about limitation of liability? These can be real risks to any acquirer buying a business. I recall that there was a technology business I was associated with many years ago, and they had a tremendous customer base, but some of the older customer agreements or sales contracts provided for unlimited liability. There was no cap on it whatsoever. That is literally a tumor lurking inside the business that has gone undetected. We were able to cure it and then when a buyer did come along, that did not derail a sale or result in a significant downgrade or cut to valuation.

And lastly, Katie, when we think about this preparedness advisory team, while we all will carry and lead this transaction inside the corporation, who are your advisors? Do you have your sell side legal account lined up? Do you have an investment banker? Do you know who would want to hire? Because having an effective intermediary in place is vital to a successful sale process. Do you know who you’d want to call? Do you have a short list or somebody you outright want to hire? This is something that’s hard to understand or to actually come to a wise conclusion or a wise answer when you’re in the midst of the buy or at the sell side to be able to make when an inbound acquisition offer shows up on your doorstep.

MMG: Thanks for that rundown, Tom. It’s a lot to consider and I think goes back to your comment earlier about starting this process as early as possible. There’s a lot to cover before you even, like you said, get that inbound inquiry.

TP: That’s right, and you have more time to work on this now, but once that offer shows up here, the work you haven’t done, it can really hurt your value and in turn affect your sale price.

MMG: That’s a really helpful rundown I think of both the financial elements to consider as well as some that are not purely financial of course. So I’m wondering, of course, a CFO and a management team should be prioritizing these elements, but how does an organization know when they are in fact exit ready? What does that look like?

TP: Great question, Katie. At the end of the day, it can come down to if you got an inbound offer, and two-thirds of growth companies usually encounter one of these at least once in their history, do you know the first 10 things that you would do? Do you have legal counsel on speed dial? Do you know of a financial representative, an investment banker, who you would call? Does your team know what to do? Have you briefed your executive team on things they should know and how you work together as a team? It comes down to, do you have a plan? How will you react when you open your inbox and there is a meeting request from a strategic acquirer or a private equity firm? Are you ready? Do you have a plan?

MMG: I think the elephant in the room for all of this though is you know a CFO, they have other things that they’re doing. They’re wearing many hats as it is. A lot of finance teams are running lean and don’t necessarily have excess bandwidth. So Tom, I’m curious how you would reconcile the inherent conflict between the task of keeping financial operations running day to day while also getting the company ready for an eventual sale in the future? 

TP: And Katie, I love the way you framed that—and it is a push-pull, there is some tension there. At the end of the day, it’s about leadership. And a CFO can and does get pulled in many different directions. As a CFO, you usually have 50 things on your whiteboard and you only get to the top half of it in the span of a year. But at the end of the day, you need to prioritize that outcome you’re managing. If you have to oversee the close process every month, and many CFOs do, do you have the right controller or the right financial leadership beneath you? It’s important to prioritize the ultimate outcome and plan your time accordingly. If you’re pulled into small tasks, are you delegating them? Do you have the right team? But at the end of the day here, that’s what you have to be thinking about. Again, begin with the end in mind. What is your Polaris? What is your north star? It should be driving, measuring and maximizing the enterprise value for your shareholders and for the business as a whole.

MMG: So it seems like a key theme that’s emerging is planning—having a plan in place so that when it is go time, you both have the plan for the exit strategy, but also a plan around the finance team and how the day-to-day can continue to run.

TP: Exactly, yes.

MMG: So before we wrap up, Tom, I want to ask you if you could leave us with just one piece of advice to the business leaders listening to our conversation. If you had to tell them one thing that they can do right now, what would it be?

TP: Begin the conversation. Sit down with your CEO, talk about, “Are we ready? What are the major elements? Do we have a plan?” But start talking about it with your CEO and the rest of your executive leadership team. While the CFO will be intimately involved and really own a lot of the leadership of that sale process, sometimes solo, sometimes in partnership with their board or CEO, have the conversation. Start getting ready, because the offer is coming, whether it’s three months or three years down the road.

MMG: Great advice to end on, and we’ll leave it there for today. But of course, we’ll be picking it back up for the next two episodes in the series, so I would encourage all listeners to look out for those. Tom, thank you so much for joining me on the podcast.

TP: Thank you for having me, Katie.

This transcript has been edited and condensed for clarity.

The Middle Market Growth Conversations podcast is produced by the Association for Corporate Growth. To hear more interviews with middle-market influencers, subscribe to the Middle Market Growth Conversations podcast on Apple Podcasts, Spotify and Soundcloud.