A good FD is essential for any business – particularly in Media & Technology where rapid growth is the norm – but entrepreneurs are not always aware of the potential benefits. Some will regard the FD as a cost centre, dragging down profits without contributing to growth.
Others will retain the recruit who was fine at an early stage in the business’s development even when the company has outgrown his or her capabilities.
When it comes to an exit process, a skilled and experienced FD can make the entire process quicker and easier, while a weak FD can jeopardise value, deliverability, end even the deal itself.
More than Just a Cost Centre
Your FD shouldn’t just be your bookkeeper, but a genuine strategic support for the CEO. The more collaborative your working relationship, and the more embedded he or she is in the business, the better he or she will be able to support you in the pursuit of your growth strategy.
The salary may appear high (how many salesmen could you recruit for that?) and it’s sometimes hard to see how the FD directly contributes to the company’s growth. However, even at the most basic level, the robust financial information and operational KPIs a good FD will give you will provide a proper perspective on where the business is and how it is performing, allowing you to move quickly to address problems and to adapt to emerging opportunities.
Looking further ahead, a good FD can ensure that your short-term investment decisions (R&D, headcount, premises) are delivering the returns they should, and that they are supporting your longer-term growth plans – or at least, not directly cutting across them.
Similarly, he or she will help you make sure that the longer-term financing decisions you make – debt or equity, and the terms on which you can raise either – encourage the development of capital value rather than reducing it.
Particularly in the Media & Technology space, the rapid growth of a business can see it outgrowing the capabilities and experience of its FD, especially if he or she was recruited early on. In the early stages, a basic bookkeeper might be all that is required, perhaps only one day a week.
As the company becomes larger, more organisationally complex and potentially more diverse in its products, services and revenue streams, so too the needs of the role change. Greater awareness of the various elements of the business, and more time alongside the operational team, is essential if the FD is going to provide financials, metrics and KPIs to enable you to make informed management decisions.
Entrepreneurs often trust long-serving team-members and repay their loyalty in kind. Those who have never had an FD who is a genuine partner to the CEO might not even be aware what they’re missing. But an FD you have outgrown will hold you and the business back. Given the rapid pace of change in the media:tech space, if you have to wait three weeks for your management accounts, you’ll be missing opportunities and will only see things when it’s too late.
To support you properly, your FD needs to be up to the challenges of your next growth phase, not struggling and out of his or her depth with the business as it is now.
Part of the Process
These issues often come to the fore in an M&A transaction. The need quickly and accurately to produce large volumes of financial data and operational metrics in addition to the ‘day job’ places significant burdens even on large, experienced and well-resourced finance teams. If your FD is part-time and won’t muck in when you need him/her, or already struggling to keep on top of the basic financial reporting, you won’t have the support you need during the process.
This can manifest itself in a number of ways:
- difficulty in preparing a robust set of historic financials to be shared with potential acquirers or investors. If they can’t get a reasonable handle on how the business has performed up to this point, it will be very difficult for them to acquire it or invest in it. A good FD will help make sure you and your acquirers/investors have a clear picture of how the company has developed financially;
- difficulty in preparing and in sticking to financial forecasts. The single biggest reason deals fall over is the failure of the company to meet the financial forecasts it has put forward to acquirers and investors. Preparing a proper, detailed, bottom-up set of forecasts linked to reasonable assumptions and KPIs is a demanding task. If your forecasting approach is to take last year’s figure and add a few percent, you will be heavily exposed to the vicissitudes of monthly trading;
- this can create a follow-on problem – multiple forecasts. Particularly in a process that takes longer than expected, you may need to reforecast. Reforecasting up is never a problem (provided it’s supported by strong trading) but under-shooting a previous forecast or reforecasting down will have a significant impact on an acquirer’s confidence, probably their valuation of the business and possibly their willingness to proceed at all. Even if you can get over this hurdle, having multiple sets of forecasts issued at different points in the process creates a version control problem, making it harder for you and your counterparty to retain a clear picture of the business’s performance and potential. A good FD can help make sure that forecasts are consistent with information previously presented, and linked to operational metrics to help justify any movements – either up or down;
- withstanding due diligence. Any information you present early in the process will be scrutinised extensively during due diligence. If they are large enough, errors in information you’ve presented will be used to justify a price reduction. Even if they are small, they will undermine the acquirer/investor’s confidence in the company’s prospects – if basic information about the past is wrong, how can they rely on your promises about the future? It is important to present information accurately and correctly from the outset to ensure you are not subsequently caught out. A strong FD is essential to keep track of all the numbers flying around and to make sure information presented supports the wider story.
The Deal is Just the Beginning
Even once the deal is done, your FD will remain invaluable. You may find yourself with an earn out to keep track of – and you will need your FD more than ever to make sure the acquirer isn’t changing accounting policies or manipulating provisions to depress your profits and deny you your earn out.
If you have brought in institutional investors, your FD will take on the essential role of managing them, keeping them informed and happy rather than worried and interfering. In this way alone a decent FD can be worth more than his weight in gold for a growth-oriented CEO! And of course all the points above will apply to the next exit round – making a strong finance director more essential than ever.