This is CFO Secrets. The weekly newsletter that unlocks the CFO office door.

5 Minute Read Time

In Today’s Email:

• 🎬 Starting a new season on M&A

• 🦍 An interfering CEO

• 💸 Cashflow Tip of the Week

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THE DEEP DIVE

The Hidden Genius Behind CEO’s $47m M&A Sprint

I got the call to go see the CEO “immediately”.

It was late afternoon on a Friday. I didn’t know it, but I was about to get a crash course in M&A.

“We are going to buy a competitor. They are in distress, and it needs to happen at warp speed. The CFO has his hands full, and thinks this is a waste of time. We are running vacant on Corp Dev, I need your help.”

He’d already agreed a price of $47m, based on nothing more than a quick read of a short Information Memorandum. He’d committed to closing inside ten working days. From a standing start. 😳

He told me, he would not move the price up or down, and wanted to close or walk away inside the ten days. Either it was what he thought it was, and $47m was the price. Or it wasn’t, and we should use the ten days to establish that, and drop out.

The target was a small poor relation of a large Group.

He believed if we could execute in two weeks we could win the process on speed and secure a deep discount. If not, we could find ourselves in an auction, and the business wouldn't be attractive at a market price.

He allocated one in-house lawyer, a $150k advisor budget, and signed off with the final line:

“See you in two weeks. Don’t let me waste $47m.”

WTF? The lawyer had a bit of M&A experience, but I was a total rookie. I’d seen one divestiture from a distance before, but that was it.

I read the Information Memorandum. The business was losing $5m, and had recently lost a major contract. That would expand the loss to over $10m per year.

And he wanted to pay $47m for this thing?

Was he insane?

I spoke to the lawyer (my new BFF) and spent all night going through the IM and the dataroom.

Bill Withers’ (RIP) rattled around my brain…

There were no due diligence reports to read or rely upon.

“Is this how all M&A happens?” I thought. Spoiler: it most definitely is not.

Anyway, time to get a plan.

I decided to spend the next 48 hours (over my weekend) doing two things:

1. Understand the rationale. What on earth did the CEO see in this thing? If we owned it, what would we do with it? And what would the finances look like? Could we justify the $47m?

2. Build a ‘sh*t case’. Even if there was a strong rationale, there was no way we could cover all the due diligence bases in ten days. So if it was a lost cause, what did that outcome look like?

I started with the sh*t case. This was a bag of sh*t after all, so seemed the right place to start.

To my surprise, between the inventory value and real estate, there was $60m-$80m of break-up market value. It might take 12 months to realize (which would cost $10m in losses.)

So a net result of $50m-$70m. Even at a 20% haircut that was a $40m-$55m asset realization.

Against a $47m purchase price, that didn’t sound so bad.

But we aren’t in this for a bunch of work just to break even. What did the upside case look like, and how probable was it?

The business was made up of four operating sites (manufacturing). Turns out three of the four were bleeding heavily. Over $20m of losses per year between the three of them. No obvious recovery path.

But that meant one was making $15m profit per year. The jewel in the crown.

“Motherf*cker” I thought. Now I got it.

Here was the play:

• Buy the business for $47m

• Spend $15m closing the three loss making operations

• Sell the three vacant properties for a net $25m

Result: a $15m profit generating business on a net investment of $37m ($47m + $15m - $25m)

And if it all went wrong? We close the businesses and cover the purchase price through liquidation of the assets.

What at the surface looked like a sh*tty vanity project, was in fact a dream deal with asymmetric upside.

The market cap of our group traded at a profit multiple of about 12x at the time. This one transaction would create almost $150m of equity value. (15×12 minus 37)

He knew this business was worth more than $47m. And he knew that if he’d worked that out, it wouldn’t be long before someone else did.

Moving quick and avoiding an auction to ‘market value’ was the tactic that unlocked the value. This explained his lassez faire attitude to DD.

A masterclass in opportunistic M&A.

My focus switched.

As long as we had clean title to the assets, this was a ‘zero downside’ play. If we were confident the real estate and inventory asset values held up, this was a free hit.

We then focused our due diligence almost entirely on this point.

It took us three weeks to close instead of the two the CEO had demanded. But he later told me he assumed it would be at least a four week process. He’d only said two weeks to get us working harder.

I’m not advocating this approach to M&A. Our DD had more holes than Swiss cheese. This was an unusual situation.

But there is a learning here. On the face value this looked like a risky transaction. But under the surface, it was not.

I can’t say I learned a huge amount about how M&A should work from the experience.

But I did learn a lesson on risk and reward that I would never forget.

Since this transaction I have done more than 20 deals of varying size worth billions in equity value.

And I even make the occasional SMB acquisition for my personal portfolio.

In this season of CFO Secrets, over the next few months, I will share what I know about M&A.

But before I do.

Three disclaimers:

1. I do not consider myself an M&A expert or practitioner. I have never had a pure corp dev role, or worked in an investment bank. I’m just a CFO who has done a lot of M&A.

2. The focus of this season is corporate M&A. There will be plenty of things useful in SMB M&A too, but the primary focus is ‘Big Co M&A.’

3. LLC, legal and tax structuring is out of scope. Structuring is vital in M&A, it can make or break a deal. But it is also geography specific. 30% of my audience is US based. 70% is not. Generic advice is of no use to you here.

OK, with the disclaimers out of the way, what do we have planned?

We will split the season into 8 newsletters over 3 stages;

• Stage 1 - Before The Deal

  • Why M&A? Theory v Practice (Week 1)

  • Valuation (Week 2)

• Stage 2 - During The Deal

  • The Deal Team. Advisors. Roles & Responsibilities (Week 3)

  • How to Buy a Business (Week 4)

  • Quality of Earnings (Week 5)

  • How to Sell a Business (Week 6)

  • From EV to Equity Value. Working Capital Pegs (Week 7)

• Stage 3 - After The Deal

  • Post Deal. Integration & Synergies (Week 8)

Excited?

Well you know I like to keep it crispy, so as a little taster to whet your appetite:

The 5 Golden rules for M&A success as a CFO

1. Control your advisors. Advisors make or break a transaction. Chose them wisely. You run the deal, not them.

2. Focus on the big stuff. Due diligence can feel 3D and never-ending. Spend 95% of your DD budget on the 4-6 things that matter.

3. The price you paid will always be the price you paid. Never overpay. Buy for less than something is worth, and it is hard to go wrong (see my story above).

4. Terms > Price. Value is about much more than the headline price. The terms can transform the risk profile. The SMB deal I wrote about in March is a great example.

5. Grab the last 5%. You can gain 3-5% of extra value on most deals by winning the working capital negotiation. I will show you how.

Don’t worry, we are going deeeeep on all these points and much more over the next 8 weeks.

Next week we will start with week 1 in this season, covering the Theory & Practice of M&A.

THIS WEEK ON TWITTER

For those unfamiliar with my story, read this:

I’m quickly becoming a memeboi… and I love it.

BOOK CLUB

No book this week.

Instead a fine CFO, with even finer hair.

If you are a future CFO of a SaaS business then Only CFO is your man.

His newsletter is a must read, with the piece on accounting shenanigans a particular highlight. He’s a great twitter follow too.

FEEDBACK CORNER

A review of the last edition:

I’ve got good news for you … keep scrolling!

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CASHFLOW TIP OF THE WEEK

Anyway …

That’s all for this week. As always you can find me here on CFO Secrets, Twitter, & LinkedIn.

I’m also on Threads, like all the cool kids. Follow me there too just in case Elon blows up Twitter by mistake.

We are going to hit the theory of M&A next week, so get your nerd glasses on, nerd.

Until next time…

Stay Crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director or friend. Well, maybe I’m your friend. But I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need to make the right decisions.