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  • How do I Know if my Company is at an Inflection Point?

    Someone recently asked me, how does a CEO know if his/her company is at an Inflection Point? By definition, an Inflection Point marks a significant change or a change in an entity’s growth curve. From my early days working in investment banking, to leading the finance and strategic planning functions of multi-billion-dollar divisions of public companies, to sitting on the board of a 3,200-location North American retailer going through bankruptcy, to leading strategy and M&A at a small-cap public company, to successfully prepping a tech start-up for sale, I have experienced many instances of companies at Inflection Points. After 30+ years of doing this, I have concluded that there are three fundamental factors that indicate a company is at an Inflection Point.  They loosely fall under the headings of - Strategy, Management, and Money.  Let us take a quick look at each. Not too long ago, a CEO came to me with the desire to sell his company. After about a month of working with him and his team, I came to the following conclusion: if the company did not change how it was doing business, it would not sell in, but more likely it would be out of business.  It is safe to say the company was at an Inflection Point (e.g., possible bankruptcy).  Certainly, that Inflection Point was not the one the CEO thought the company was at when he engaged me (i.e., ready for sale).  The CEO’s strategy to sell the business in the next year must be set aside. I shared my assessment with the CEO. To be honest, he did not initially agree with my thoughts.  It was not until the company closed the quarter with a significant loss that the CEO understood and accepted which Inflection Point the company was at.  This is where money kicked in.  A significant change in a company's financial condition (i.e., “money”) will indicate an Inflection Point. So, what was the Money issue: The company’s fixed costs were too high, and its revenue was too concentrated on a few client relationships nearing the end of their contractual lifecycle.  Several things needed to change.  In short, a significant loss (aka money) led CEO to reassess the company’s strategy and ultimately its management (the third key driver).  For the sake of time, I will not delve into details of management change, but rest assured, there were changes. Leap forward, the company has a new and more streamlined management approach and team, a far more efficient cost structure, and a more focused overall strategic direction.  As a result, its profit margin went up nearly 50% from historical rates, and overall profits went up by nearly one million dollars.  In other words, strategy, management, and money all changed.  Fortunately for the company, the CEO was open to making these changes. The CEO may still consider selling in a few years, but he is also more open and even excited about expanding the company through new service offerings, new partnerships, and even acquisitions.  So, a new strategy may be emerging, meaning changes in management and a need for more money are not too far behind.  I look forward to helping the company work through the next set of Inflection Points in its evolution. If your company is at an Inflection Point and you are looking for an experienced strategic advisor to help you through it or considering selling your business, please feel free to contact me.  I look forward to assisting you. Bob Fiorella CEO and Founder of First CxO. Bob Fiorella is a strategic problem solver, M&A advisor, and right-hand man to CEOs and business owners contemplating or dealing with a major change; whether it's restructuring a company, building a finance team, getting a loan, setting the company up for growth, successfully selling the company, etc.  He began his career as an investment banker and worked on several deals including the multibillion-dollar merger of Avery and Dennison.  Over the subsequent two decades, Bob’s career centered around the media, entertainment, packaged goods, wholesale distribution, specialty retail, technology, and software development industries where he took on roles such as SVP Finance, Chief Financial Officer, Chief Operating Officer, Chief Strategy Officer, and independent board member. Bob is the Founder and President of First CxO.  Some of his assignments include being a fractional CFO for a $30mm packaging technology company, a $5mm software development company, and a $25mm e-commerce company.  He is also an advisor to a $500mm franchising company.  Bob holds a BS in Economics from Cornell University and an MBA from UCLA’s Anderson School of Management. Bob’s “claim to fame” is appearing on Season 13 of America’s Got Talent as part of the Angel City Chorale. They made it to the Semi-Finals.

  • How Much is My Company Worth? 

    Having spent the last 30 years as an investment banker, M&A advisor, board member, and CFO working with all sizes and types of companies and transactions, I frequently get asked by private company owners, “How much is my company worth?”  Below I will outline the valuation process with the hope of helping you better understand that complex question. In general, there are three main techniques used by thousands of valuation firms, investment bankers, Wall Street researchers, and business school finance professors to value a business.  They are called different things by different people, so I will use the terminology I learned when I first started doing valuations. For simplicity, let’s call that the company that is the subject of the valuation the “Target” and the party doing the valuation the “analyst” or “valuation firm.” Comparable Companies In the “Comparable Companies” methodology, the analyst’s goal is to find publicly traded companies that have similar characteristics as the Target.  Characteristics could include industry, revenue, geography, customers, markets, etc.  The analyst then compares the overall stock market value + debt (the “enterprise value”) of the comparable company to that company’s relevant financial metric (e.g., revenue, EBITDA, net income), resulting in a multiple of the financial metric (most commonly EBITDA) to the enterprise value of the comparable company. Example: if a comparable company has a stock market value of $80mm and $20mm in debt then the enterprise value of a company is $100mm.  If a recent 12-month EBITDA of the company is $10mm, then the EBITDA multiple for the company is 10x ($100/$10 = 10). In the Comparable Companies method, like the Comparable Transactions method below, the analyst’s goal is to find as many comparable companies to the Target as possible - the larger the dataset, the better - without compromising the relevance and quality of the comparable companies. There is no hard and fast rule on what makes a company “comparable.” Nor is there a rule on the total number of comparables needed, but let’s assume 5-10 companies for now. Once the analyst has a list of comparable companies, the next step is to collect the relevant financial information from those companies and create a set of valuation multiples.  From that dataset, the analysts will eliminate the outliers and then look at the low to high range, average, and median multiples.  Lastly, the analyst will apply the results of their analysis to the Target. Example: Assuming the median EBITDA multiple for a set of seven comparable companies is 10x, the average is 9x and the range is between 7x and 13x.  Assume also that the Target’s latest EBITDA is $5mm, then the potential values for Target are: Comparable Transactions: Similar to the Comparable Companies method above, in the Comparable Transactions method the analyst looks for data from publicly available data for recent sales or acquisitions of companies similar to the Target.  This Mergers and Acquisitions (M&A) transactional information is available through public documents filed through the SEC (e.g., 8K’s 10k’s, etc.) and/or is gathered through other means (e.g., investor calls, new articles, etc.) Then, similar to the Comparable Companies method above, the analyst creates multiples of enterprise value from those transactions and applies those transaction multiples to the Target. Example:  Again, assume the Target has EBITDA of $5mm.  Let’s assume the comparable transaction analysis comes up with ten recent comparable transactions with a median EBITDA multiple of 11x, and average of 12x, and a low to high range of 6-15x.  The range of values for the Target using the Comparable Transactions method would be: Discounted Cash Flow Method: The next valuation method comes in various forms and can be called different things.  I am lumping all of them under the generic term of “discounted cash flow” (aka DCF).  In a DCF, the objective is to forecast the profitability / cash flow of the Target in the future (typically 3-5 years), assume a value of the Target at the end of that term (a “terminal value”), and discount all of the above back to today’s dollars using an appropriate discount rate. There are volumes of financial textbooks written on the subject of DCFs.  I will not address them here as the subject is too complicated.  However, one thing to note is that DCFs are the backbone of how Wall Street investment firms value stocks.  Wall Street looks at the future potential of a company and discounts that future potential back to today.  DCFs are also how many VC firms or other investors value early-stage startup companies.  The idea of looking at future potential earnings explains why companies that have no profit or cash flow can be valued for hundreds of millions or billions of dollars.  (Think about Amazon in the early 2000s.) Reconciling the Data (aka Averaging): The last step in the valuation process is reconciling the data which I simply call “averaging.”  Now that the analyst has three sets of data (comparable companies, comparable transactions, and DCF) resulting in many different potential values, what is the Target really worth?  The true answer to this question is - whatever a buyer is will pay for it!  A more technical or legal answer might be: what a willing buyer and a willing seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of relevant facts, agree to the value of the Target. However, the entire reason for a valuation in the first place is to answer the “how much is my company worth?” question prior to or in anticipation of taking the Target to market. So what do most valuation firms do with the data they have collected? They review the underlying data, the outliers, the overall market, the resulting valuations, etc. based on their expertise.  They then average the data, using some method of weighting the data as part of their proprietary process.  They then come to a range of values for the Target. Does this Work? Hopefully, you now have a basic understanding of the valuation process.  You may have noticed that there is a lot of “science” (i.e., math) to the process.  But you may have also noticed that there is some “art” to it as well.  By “art” I mean assumptions, creativity, hunches, etc. used in the valuation process.  It’s not all science.  For example, one valuation company's “proprietary” method of averaging will be different from another company’s, one company’s comparable sets will be different from another company’s, and one company’s terminal value and discount rate will be different from another company’s.  To hammer home the point, two different people at the same company will likely make different assumptions and can therefore come up with different valuations for the same Target. So the big question you may ask yourself is “do these methods work?”  Given that most valuation companies use similar methods to value larger private or publicly traded companies, my general answer to the question is “yes these valuation methods work,” if for no other reason than if everyone is valuing companies the same way then they should all come to similar conclusions. However, note that I said larger private or public companies above.  For smaller private companies, I suggest you read another article I wrote called: Company Valuations in the Lower middle-market. If you are interested in a valuation, a sale or strategic business consulting and are looking for an experienced advisor, please let me know.  Thanks. Bob Fiorella CEO and Founder of First CxO. Bob Fiorella is a strategic problem solver, M&A advisor, and right-hand man to CEOs and business owners contemplating or dealing with a major change; whether it's restructuring a company, building a finance team, getting a loan, setting the company up for growth, successfully selling the company, etc.  He began his career as an investment banker and worked on several deals including the multibillion-dollar merger of Avery and Dennison.  Over the subsequent two decades, Bob’s career centered around the media, entertainment, packaged goods, wholesale distribution, specialty retail, technology, and software development industries where he took on roles such as SVP Finance, Chief Financial Officer, Chief Operating Officer, Chief Strategy Officer, and independent board member. Bob is the Founder and President of First CxO.  Some of his assignments include being a fractional CFO for a $30mm packaging technology company, a $5mm software development company, and a $25mm e-commerce company.  He is also an advisor to a $500mm franchising company.  Bob holds a BS in Economics from Cornell University and an MBA from UCLA’s Anderson School of Management.  Bob can be reached at 310-422-6858, bob@firstcxo.com. Bob’s “claim to fame” is appearing on Season 13 of America’s Got Talent as part of the Angel City Chorale. They made it to the Semi-Finals.

  • What is a CFO?

    Far too many times, I come across business owners and CEOs (owners) who say they have a CFO only to find out when I ask a few questions that the person they call a CFO isn’t a CFO.  In all reality, the owner’s CFO is really their bookkeeper, clerk, office manager, accountant, CPA, controller, chief accounting officer, or, God forbid, their uncle, nephew, spouse, or cousin Sal.  With that type of “CFO,” is it any wonder why the company isn’t growing, or profits have stagnated, or why the owner can’t sleep at night or has no viable exit strategy? Decoding the Role: Unveiling the Functions of a CFO A real CFO is a strategic business partner, advisor, confidant, customer service person, and mentor to an owner.  Too often, owners think a CFO is supposed to put together their financial statements.  No!  A CFO is not your bookkeeper, accountant, or controller.  That is not their job.  Like any good leader, a true CFO will retain and lead people who are experts in those roles.  A true CFO will set the goals, objectives, and timelines for those tasks and will ultimately be accountable for the results.  But if the CFO is doing those tasks day-to-day, then your CFO is really a Controller. So stop calling them the CFO. If your CFO doesn’t understand your marketing plans, the sales strategy, how your warehouse operates, who your key customers are and what makes them buy, or who the competitors are, or if they can’t speak clearly and confidently to your investors, bankers, or the board, or they can’t look you in the eye and politely point out problems with your strategy and offer up solutions, then fire them now! One of my first bosses told me something that locked me into the finance field early on in my career; there are only two people at the company who need to know everything about the business - the CEO and the CFO. A CFO is a business planner.   One thing I have learned through the years is if you are CEO or an owner, it is lonely at the top.  A true CFO should be able to relieve some of that burden. If your CFO isn’t your right-hand man, you need to find one who is. If you are interested in a valuation, a sale, or in strategic business consulting and are looking for an experienced advisor, please let me know.  Thanks. Bob Fiorella CEO and Founder of First CxO. Bob Fiorella is a strategic problem solver, M&A advisor, and right-hand man to CEOs and business owners contemplating or dealing with a major change; whether it's restructuring a company, building a finance team, getting a loan, setting the company up for growth, successfully selling the company, etc.  He began his career as an investment banker and worked on several deals including the multibillion-dollar merger of Avery and Dennison.  Over the subsequent two decades, Bob’s career centered around the media, entertainment, packaged goods, wholesale distribution, specialty retail, technology, and software development industries where he took on roles such as SVP Finance, Chief Financial Officer, Chief Operating Officer, Chief Strategy Officer, and independent board member. Bob is the Founder and President of First CxO.  Some of his assignments include being a fractional CFO for a $30mm packaging technology company, a $5mm software development company, and a $25mm e-commerce company.  He is also an advisor to a $500mm franchising company.  Bob holds a BS in Economics from Cornell University and an MBA from UCLA’s Anderson School of Management.  Bob can be reached at 310-422-6858, bob@firstcxo.com. Bob’s “claim to fame” is appearing on Season 13 of America’s Got Talent as part of the Angel City Chorale. They made it to the Semi-Finals.

  • Why Use an M&A Advisor?

    As fractional CFO and M&A advisor, I frequently come across CEOs and business owners (“Sellers”) who are thinking about selling their company. Frequently, Sellers are skeptical about the need to hire an advisor like me.  Afterall, advisors are not cheap. For example, an M&A advisor will cost anywhere from 2.5-10% of the overall sale price of the company, depending on the size of the business sale.  Or maybe Sellers do not want to engage an advisor because they think they already know to whom they can sell their company. Or maybe they even have a buyer currently courting them.  So why, then, should a Seller hire an advisor?  The top 6 reasons are below. Valuation As a business owner, chances are that you do not have a realistic expectation of the value of your company.  I cannot tell you the number of times I have been quoted unrealistic company valuations by potential Sellers.  So rather than guesstimate your company’s worth, why not engage an advisor whose primary occupation is to advise buyers and sellers of companies and can therefore give an objective and experienced business valuation based on tangible data? Make the Market: One of the primary purposes of an M&A advisor is to find lots of potential buyers for your company.  M&A firms “make a market” for a business sale.  To be clear, one buyer does not make a market.  A market consists of multiple potential buyers.  So, while a Seller may get approached from time to time by one or two possible buyers, that does not mean those buyers represent what the company is really worth. The only way to know what a company is worth is to take the company to market! The Benefits of Competition: Running a competitive sale process has the potential to drive several key benefits.  For example, more potential buyers increase the likelihood of more offers.  More offers increase the likelihood of a higher price.  More potential buyers also increase the probability of finding the “right” buyer for your business.  More buyers also increase the company’s leverage during the sale process.  If a Seller is only talking to one buyer, then that one buyer has all of the leverage. Objectivity: Let’s face it, most business Sellers only sell a company once in their career if they are lucky.  And when they do, chances are that their experience during the sale process is an emotional rollercoaster.  On the other hand, an experienced M&A advisor will sell hundreds of companies over their career thus giving them insights into what works and does not work when selling a business.  And because an M&A advisor does not have the personal and emotional attachment to the company that an owner, CEO or other member of management have, the M&A advisor should be able to remain objective during the sale process.   By remaining objective, the M&A advisor helps increase the probability of success. Keep an Eye on the Bottom Line: Using an M&A advisor allows the Seller to keep their focus on operating the business at its highest level during the sale process.   Any slip in company performance during the sale process opens the door to “re-trading” – the practice of renegotiating the purchase price of a company after initially agreeing to a higher price.  One of the key roles of the CEO or owner during a sale process is to make sure the bottom line stays healthy.  So let the M&A advisor focus on keeping the sale process moving forward while the CEO/owner keeps the business humming. Momentum: No matter what type of business deal you are working on, if someone does not keep the deal moving forward, then the deal dies.  Since M&A advisors are not distracted by day-to-day operating issues at the company they are trying to sell, and as M&A advisors are mostly compensated based on a success fee, M&A advisors are highly motivated to keep up the momentum during a deal process.  At the end of the day, momentum makes deals. Bob Fiorella CEO and Founder of First CxO. Bob Fiorella is a strategic problem solver, M&A advisor, and right-hand man to CEOs and business owners contemplating or dealing with a major change; whether it's restructuring a company, building a finance team, getting a loan, setting the company up for growth, successfully selling the company, etc.  He began his career as an investment banker and worked on several deals including the multibillion-dollar merger of Avery and Dennison.  Over the subsequent two decades, Bob’s career centered around the media, entertainment, packaged goods, wholesale distribution, specialty retail, technology, and software development industries where he took on roles such as SVP Finance, Chief Financial Officer, Chief Operating Officer, Chief Strategy Officer, and independent board member. Bob is the Founder and President of First CxO.  Some of his assignments include being a fractional CFO for a $30mm packaging technology company, a $5mm software development company, and a $25mm e-commerce company.  He is also an advisor to a $500mm franchising company.  Bob holds a BS in Economics from Cornell University and an MBA from UCLA’s Anderson School of Management.  Bob can be reached at 310-422-6858, bob@firstcxo.com. Bob’s “claim to fame” is appearing on Season 13 of America’s Got Talent as part of the Angel City Chorale. They made it to the Semi-Finals.

  • What is a Fractional CFO?

    Over the past few years, the term “fractional” has become popular in the business consulting world. But what does “fractional” mean? Let us break jobs down into 3 basic categories: Full-time. I think everyone knows what this means - right?  Someone works 40 hours a week exclusively for one company. A full-time role is intended to be permanent and exclusive to the employer. Interim: For example, a full-time employee leaves a company for some reason (fired, parental leave, etc.) or a company feels the need to hire someone full-time but hasn’t yet.  In these cases, the company is looking to fill a role for a specific period of time. The person filling the role works for the company exclusively for that period of time. Another term for “interim” is “project based.” Fractional. A fractional executive works with multiple companies at the same time (say one day a week per company). They are not full-time, and they are not interim. Using more dated and clearly less sexy terminology, a “fractional” executive is a part-time consultant. So, what is a Fractional CFO? A fractional CFO is a strategic advisor to you and your company. They may hire, train, monitor, and lead your internal and external finance and accounting teams, but they themselves don’t do the accounting or booking. However, they will use the information provided by the finance and accounting team and the sales and marketing, operations, legal, technology, and HR teams at the company, as well as information from third parties (e.g., banks, CPAs, etc.) to create analyses, plans, metrics, and other strategic data to advise, guide and mentor a CEO or business owner as s/he looks to the future.   A true fractional CFO is a business planner, not a bean counter. If you hire a CFO to do your accounting and bookkeeping you are likely overpaying for that resource or you are inflating the title of the person doing those tasks. Both are costly to you. Bob Fiorella CEO and Founder of First CxO. Bob Fiorella is a strategic problem solver, M&A advisor, and right-hand man to CEOs and business owners contemplating or dealing with a major change; whether it's restructuring a company, building a finance team, getting a loan, setting the company up for growth, successfully selling the company, etc.  He began his career as an investment banker and worked on several deals including the multibillion-dollar merger of Avery and Dennison.  Over the subsequent two decades, Bob’s career centered around the media, entertainment, packaged goods, wholesale distribution, specialty retail, technology, and software development industries where he took on roles such as SVP Finance, Chief Financial Officer, Chief Operating Officer, Chief Strategy Officer, and independent board member. Bob is the Founder and President of First CxO.  Some of his assignments include being a fractional CFO for a $30mm packaging technology company, a $5mm software development company, and a $25mm e-commerce company.  He is also an advisor to a $500mm franchising company.  Bob holds a BS in Economics from Cornell University and an MBA from UCLA’s Anderson School of Management.  Bob can be reached at 310-422-6858, bob@firstcxo.com. Bob’s “claim to fame” is appearing on Season 13 of America’s Got Talent as part of the Angel City Chorale. They made it to the Semi-Finals.

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