📬 Prepping for exit: Real earnings or short-term optics?

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I love answering your toughest questions. Hit me with your most challenging CFO issue, and you could be featured in an upcoming Mailbag.

👉 Send me your questions by filling out this form.

Now, on to today’s Mailbag.

We’ve got some great topics. Here’s what’s on tap:

Now, let’s get into it.

Millennial CFO from Midwest, USA asked:

I am the CFO of a services firm that provides administrative support to small businesses. Our business is very people-heavy and has experienced rapid (>100% growth) over the past 2 years. We are about to surpass annual revenues of $10m.

Our main focus for the past 2 years has been to drive EBITDA as high as we can to achieve the best multiple upon pursuing investment. By doing so, we've enabled our growth through very lean middle management teams and a fairly horizontal structure.

We've gained interest from several PE groups, and it seems like working with one is a likely path based on the goals of our founders and senior leadership.

My struggle is: how do you balance the short-term objectives of maintaining profitability where it is (to maximize our value to an investor) while ensuring future continuity and ability to support growth on the same trajectory that would be expected by an investor (particularly PE)?

If we invest in more people to get ahead of growth and build that structure now, profitability will take a hit in the short term, right as we are providing new financial data to an investor. If we don't make that investment, the wheels may start to fall off as we grow more due to the sheer scale of people and technology investment needed with how we're structured today.

Interesting question, Millennial CFO.

I think about investing ahead of an exit like timing your sprint at the end of a marathon. Too early and you’ll miss the peak. Too late, and you’ll be full of regret. Just ask the medalists in the marathon at the recent World Athletics Championships:

The devil is in the details.

Let’s say your EBITDA is $2m today, tracking to $3m within three years. You could invest $0.5m in growth opex now, which drops current EBITDA to $1.5m but positions you for $5m in three years.

All things being equal, the multiple on the $2m scenario will be lower than the multiple on $1.5m, so the right answer is in the deal math. What’s the ROI on that incremental $0.5m? If it compounds at a rate north of your likely investor’s hurdle (20-25% IRR), it’s worth doing.

A smart banker can help you frame that investment as an add-back - a one-off cost to build scalability - so it doesn’t drag valuation. And the truth is, PE buyers will haircut unsustainable EBITDA anyway. If you’re running too lean, they’ll adjust earnings down because they know those middle-management gaps will need filling.

The goal is defensible earnings, not short-term optics.

As a rule, do the right thing for the business and build your sale story around it. Well-run diligence will always reward sustainable EBITDA and credible growth levers over quick-fix profitability.

That said, I’d pause for a moment and think about timing. At $10m revenue, you’re still below the typical institutional PE threshold. You’re in the SMB zone, where deals trade at 3-5x EBITDA. If you can push to $20m revenue and $5m+ EBITDA, you move into true institutional territory, which could be worth another two turns on your multiple.

So the question isn’t just “should we invest ahead of the deal?” It’s “what’s the most valuable exit path?” If you can grow another cycle and double again, the economics shift completely.

TLDR: Don’t starve the business to dress it up for sale. Invest where you can show ROI and scalability, document it cleanly as part of your adjusted EBITDA story, and focus on building defensible earnings. If you can scale beyond $10m before exiting, you’ll graduate into a better buyer set and a higher-quality multiple.

Same problems, different year from NYC, USA asked:

Each year, we go through our planning cycle (mar-tech SaaS business), part of which is figuring out how much pipeline generation/coverage we need each quarter to theoretically hit the new ACV plan each quarter. Of course, we compare this against our sales capacity and existing pipeline, where possible, as other reasonableness checks.

That said, as the year progresses, we always end up seeing much lower pipeline than we planned for, meaning our coverage is super low, which inevitably sounds the alarm. It’s likely a hygiene issue (unqualified deals added to juice number, sits there for 6 months, then moved to dead, for example) which we’re looking to address. Problem is, no one is actually held accountable for hitting the pipeline targets. The sales leaders may get a talking to, but nothing actually happens. And then they usually miss their goals. Cue hiring freeze, cost-cutting, and possible RIF.

1. How can we break the cycle and actually get folks to care about pipe gen (particularly qualified) and who should truly own the pipe gen number?

3. Is it possible we just don't truly have enough greenspace to hit our goals? Maybe it’s a PMF issue? How can we prove that?

3. What is 1 single way a small FPA team can help the business hit these targets? Even if it’s not traditionally in the FPA team’s purview, I don't have it in me to just highlight the problem and do nothing about it for another year.

“What gets measured gets managed” must be one of the most well-known quotes in business.

It’s attributed to OG management guru Peter Drucker.

But there’s a big problem with it.

The idea was first written in 1954, in an era when it was hard to measure things. To create even the most basic metric would mean a foreman manually weighing their output every hour, writing it down on their clipboard, maintaining manual ledgers, using an adding machine to aggregate and calculate, and doing it with graphite-smudged fingers while the line rattled behind them.

If they wanted a chart, they’d spend their Sunday hunched over graph paper with a slide rule like a Cold War codebreaker. If they wanted a weekly comparison, they’d pull out the prior sheet from their archive of identical sheets going back years, line it up edge to edge, and check the numbers with the same care they applied to the precision engineering on the shop floor.

With that kind of friction and effort, you would damn well make sure you were a) only measuring important things, and b) those things were used to run the business, even if they were basic.

Drucker died in 2005… at the ripe old age of 95. Which means he never got to see the era of mass automated calculations (Excel), fueled by every data point you could imagine (ERPs, SaaS tools).

Now, anyone in the organization can fart a new KPI into the business without a second thought.

We think we are better at measuring things now. We aren’t. We have more tools available. We’ve done what humans are good at: make it more abundant, more complicated, and flooded ourselves until we can’t see the wood for the trees.

And people say CFOs are more ‘strategic’ now…

Rant over. Wow… not quite sure where that came from, but it’s clearly been bugging me for a while.

Anyway, back to the point.

Just because you are measuring it, does not mean it gets managed. In fact, it often means the opposite.

For a metric to matter, it must have a consequence attached to it. Consequence works in two directions: carrot and stick. It is undefeated:

So your real issue is not pipeline hygiene or forecasting accuracy. Your issue is that there is a complete disconnect between pipeline metrics and the incentive structure of the business. That is a leadership problem.

Your job is to force that gap into the spotlight and get people to care. You do that with a two-pronged attack.

Bottom up: create interest, competition, and embarrassment. Report pipeline in absolute dollars and in change over the month. Layer in quality metrics like conversion by stage or aging. Do it by team, by manager, even by SDR. Leaderboard the whole thing and publish it every week. RAG the hell out of it. Humans hate being at the bottom of a public leaderboard more than they hate being yelled at. Use that.

Top down: make the consequences impossible to ignore. Build a few simple scenarios. One that shows what happens if pipeline growth continues at the current anemic pace. One that shows what happens if it improves by X. Then sit with the CRO and CEO and force a cause-and-effect conversation. “If this pipeline trend continues, here is exactly what Q3 and Q4 will look like.” Put the financial implications in their faces. Lazy leaders do not act until the math embarrasses them.

As for your final question, the one thing FP&A can do to meaningfully change the outcome is to quantify the gap in a way that creates urgency. Map the implied bookings shortfall based on today’s pipeline, and translate that into the cost actions that will follow: hiring freezes, CAC pullback, RIFs. Show them the second-order consequences of ignoring the pipeline. That is how you turn FP&A from “reporting the problem” into “forcing the business to act.”

TLDR: Leaderboard the teams, create competitive heat, and model the financial impact so starkly that the exec cannot pretend the issue is cosmetic. FP&A’s superpower here is forcing clarity and urgency.

In the Annapolis from Indianapolis, IN asked:

Did you make your logo in Microsoft Excel? Was it designed to look like you did?

So… no, I didn’t use Excel, although that would have been funny.

I created the Twitter account in the Summer of 2021, and used an 8-bit character app for the iPhone to make this guy in less than 30 seconds:

Even though it took me a full twelve months to actually publish my first post (story for another day)…

Eventually, I hired a designer (hi, Julien) to help give me a bit of a spruce up and lose that god awful tie. (I believe a tie has no place in modern society unless you are in court or at a wedding.)

To your question… was it designed to look like me? Well, yes, kind of, I guess. Insofar as I have face and a beard. But I took the liberty of making myself look younger, handsomer, and pixelated-er because… well, I can :)

I have always published my newsletter under the brand name ‘CFO Secrets’ to distinguish the person (me) from the newsletter (this). But I will likely change that soon. I’ve found that people identify with the Secret CFO avatar and branding far more. And I’ll be honest, I’ve really come to love the little guy.

There was also a BRIEF flirtation with this guy, but the less said about that, the better. OG readers will remember.

TLDR: If you choose to pixelate your face, you can be anything you want to be.

A few of the biggest stories that every CFO is paying close attention to. This is the section you might not want to see your name in.

Fantastic headline and story. Eli Weinstein, formerly convicted of a real estate Ponzi scheme that landed him 22 years in prison, followed by a conviction for defrauding investors during the Facebook IPO (another 2 years), was pardoned in 2021. Now he’s been convicted again of (you guessed it) investor fraud to the tune of $35m.

Will be following the promising career of this recidivist fraudster closely.

More big changes at Citigroup with 25-year CFO veteran Mark Mason stepping down. In case you missed it, last month, CEO Jane Fraser was appointed chair by the Citi board. We’ve featured Mason in this newsletter before, showcasing him as an excellent written communicator.

PwC UK and Palantir are “expanding” their strategic alliance. The press release is notable for its outrageous serving of buzzword salad. Have a read, if you have any idea what they are saying, please hit reply and let me know.

ICYMI, here are some of my favorite finance/business social media posts from this week. In the words of Kendall Roy, “all bangers, all the time.”:

Let’s also take a moment to salute Idris who is clearly insane having worked for a minimum of 3 (arguably 4) too many of the Big 4:

I frequently get asked about how to approach acquiring small businesses. I've built a little portfolio of SMB businesses over the last few years. It's a lot of fun, but it can also be a nightmare if you get it wrong.

If you want to learn more, check out this free 30-day email course from the team at Edler Zain.

Let me know what you thought of today’s Mailbag. Just hit reply… I read every message.

And on Saturday, I continued this month’s Playbook series on scaling the finance function to its Connected stage. Instead of decision-making flowing in and out of gates with finance standing at the door, finance now builds the guardrails and focuses on managing the environment in which decisions get made. Check out the newsletter here.

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.