The CFO’s Guide to M&A: Ten Fundamental Questions Answered
For finance leaders, there’s one subject where the stakes are higher than almost anywhere else. We’re talking about mergers and acquisitions.
Unfortunately, until you’ve been through the process of acquiring another business (or being acquired), it can be hard to know what to expect.
We recently hosted a CFO Connect meetup in London, where we were joined by two CFOs with a wealth of experience on both the buy and sell sides of M&A: Catherine Birkett, CFO at GoCardless, and Ben Withinshaw, CFO at Communigator.
Our discussion helped to illuminate a lot of important questions when it comes to M&A, including the role of finance during a deal process, the most important thing to get right with M&A, and how you can avoid catching the dreaded ‘deal fever’.
In this post, we’ll run through ten fundamental questions every CFO has when it comes to M&A, and try to shed some light on this often tricky area.
About our experts
Catherine Birkett, CFO at GoCardless: Catherine has considerable experience in multi-national business, including 18 years at Interoute, first as Financial Planning and Analysis Manager, then as CFO. She is now CFO at B2B payments outfit GoCardless.
Ben Withinshaw, Finance Director at Communigator: Ben is currently Finance Director at marketing platform CommuniGator, and has extensive experience working in the medical equipment and community brokerage sectors, as well as in fund audit for PwC.
1) What role should the finance team play in M&A?
The role of the finance team in M&A is always a little different for each business, and for each deal, Catherine points out. “My experience has always been that a team’s approach to M&A evolves organically, especially for businesses without a dedicated M&A team.”
“My role as CFO has been to consider potential acquisitions, take care of due diligence, and get across all the numbers. It’s my job to strike a balance between all this information and demonstrate the value of a new purchase to the shareholders.”
Ben has a similar conclusion. “As CFO, I’m there to produce the data behind the story, and to provide an objective set of eyes across the numbers. I treat things as black and white, and let the shareholders take their own view.”
2) What’s the most important thing for a CFO to get right?
For Catherine, there’s one M&A task that sticks out above all others in terms of importance. “You need to dig into all the relevant numbers, then think about exactly how you’re going to bring another business’s numbers into your own.”
“For us, this was a real learning curve. At Interoute, we’d bought a business about a third our size, but they had some issues with their numbers, and it took a lot of effort to sort out. This was time-consuming, but critical.”
The overall lesson, according to Catherine? “Be very cautious about businesses with poor or patchy data.”
For Ben, his most recent experience is on the vendor side of the table. “I came on board at Communigator not too long before our sale. We needed to firm up our numbers a little, and had to approach this with urgency because of the sale.”
Of course, says Ben, the CFO shouldn’t lose track of their core responsibilities, too. “We had to run the company finances at the same time. This was just something that needed to be done.”
3) How does the M&A process impact the finance team?
When it comes to what to expect, Ben doesn’t mince his words. “M&A can be heavily labour intensive. Sometimes this is due to the confidentiality of the situation - if you have just a handful of people in the tent, you all need to push hard to stay on top of things.”
Catherine is equally frank. “At Interoute, the amount was asked from our finance team during the acquisition process was crazy. In the end, everyone did an amazing job, but we had plenty of late nights getting the data together.”
So, if you’re a CFO getting involved in the M&A process, be sure to prepare yourself - and your team - for a steep climb.
However, says Catherine, don’t let the size of the task put you off. “Finance is the team under the most pressure during an acquisition, but it’s worth it in the end. It’s very rewarding.”
4) How should you approach due diligence?
Due diligence, the investigation or audit of a potential investment, is a huge part of M&A - no matter which side of the table you’re on.
For Ben, the experience of going through vendor due diligence has been challenging, but critical. “Part of the due diligence process with Communigator was working through our historical information. This created a huge amount of work, but was key in the end.”
Catherine’s experience as a purchaser is similar. “You have to focus on the harder questions, and not be blinded by your interest in the deal. It’s crucial not to get carried away with due diligence, and to focus on all the right questions.”
An equally crucial part of the process is knowing when you need to call in the cavalry.
5) When should you bring in outside help?
While it’s possible to handle M&A completely internally, it’s unlikely unless you’re part of a very large firm with a dedicated M&A team. It’s a complicated legal process with potentially significant taxation and regulatory implications.
Fortunately, there are plenty of specialist firms ready to jump in and help out both purchasers and vendors.
For Catherine, enlisting relevant experts can be helpful - providing you can get the right people. “For both our big deals, we needed private advisors on board. It’s about finding the right personalities, and getting a team your people feel comfortable working with. If you don’t have that rapport, it can be hard.”
Ben tells a similar story. “We found an advisory firm via one of our shareholders. This was a personal contact, and it’s worked really well as the relationship and trust was already there.”
6) What should you expect in terms of staff synergies?
With an M&A process, the hardest part is often knowing what to expect in terms of staff synergies. In other words, who is likely to stay on board after the deal, and who won’t be needed?
For Catherine, this question depends a lot on the reasons for the purchase. “If you’re buying a business to leave it alone and let it run independently, people will stay on. If you’re buying something to truly integrate it, you’ll always lose some people. It happens.”
“You can try to keep key individuals,” says Catherine. “But at the senior level it hardly ever works. Executives usually don’t want to stay on after an acquisition.”
7) How should you drive integration after an acquisition?
One of the trickiest things to get right when it comes to M&A is integration. After all, you’re taking two entirely separate businesses and splicing them together - there will always be a lot of tough decisions to make.
Catherine has a few words of wisdom. “The real crux of the matter is the logistics of bringing two businesses together. You need to work alongside someone from engineering, someone from sales - whoever you need to build a real understanding of the mechanics of the business.”
And another key factor? Having a clear deadline. “When Interoute purchased Easynet, our goal was to migrate all systems to the core Interoute systems. We established a deadline of doing this within a year, and set out a clear programme to do so.”
8) Which valuation method is best?
Now, we’re getting to the real heart of things: how should you go about valuing a company in an M&A process?
Ben has a few suggestions. “In the past, we’ve used a combination of contracted SaaS value, revenue, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation). From my perspective, this met the expectation of all parties.”
Catherine is largely on the same page. “We looked at things from a discounted cash flow basis, and examined the expected synergies. Our ultimate benchmark focused on EBITDA, though, and we never deviated from the numbers we had in mind.”
So, with all that detail in mind, how can you stay focused on answering all the right questions, and avoid catching ‘deal fever’?
9) How can you avoid ‘deal fever’?
M&A can be an all-consuming process. The documentation, the negotiating, the late nights - if you’re not careful, M&A can send even the most experienced operators a little loopy.
So, what can you do to stay on the ball, and not succumb to so-called ‘deal fever’? How can you make sure you stick to your bottom lines without being tempted to cut corners in pursuit of a faster deal?
For Catherine, it’s all about sticking to a plan. “At Interoute, we set out a clear timeline of the steps involved with putting numbers together. This was key to maintaining confidence, and to avoid being rushed.”
“Approaching any deal, the CFO has to be the calming influence. You need a mechanism to highlight any risks in a potential deal, and elevate these to the right place. If the risk is too big, you have to be willing to leave the table.”
10) Any other tips for CFOs looking to pursue M&A?
“Always think about issues between jurisdictions,” Catherine says. “If you’re purchasing a company internationally, you have to anticipate issues around taxes, legal requirements, and staffing. You should have a plan for these.”
“It always helps to build a little extra time into the process,” says Ben. “During our last sale, we wanted to go to market six months earlier than we did. If we’d taken a step back and spent more time on the data, things would have happened more quickly in the end.”
There’s always more to learn
When it comes to M&A, there’s always more to learn, even for experienced CFOs. That’s what makes it so important to listen to others and build your own knowledge on the subject.
In this article, we’ve answered ten of the most common questions when it comes to M&A. Our huge thanks to our experts, Catherine and Ben, for sharing their wisdom and expertise on this complicated topic. And thanks also to GoCardless for hosting us!
While you’re here, why not check out our list of upcoming CFO Connect events near you, and come join us in person? We’d love to see you!