Hiring a finance director before selling your business

In many owner-managed businesses, finance means a bookkeeper or a small accounts team, an external accountant who prepares the annual accounts, and an owner who understands the numbers well enough to run the company. That is enough to trade and to file. A sale process asks far more of the finance function, and much of the work falls on it during the months when the business still has to be run.

What a sale asks of the finance function

During a sale, the finance team is expected to provide:

• Monthly management accounts that are produced on time and reconcile to the statutory accounts.
• Support for financial due diligence. The buyer's accountants usually test the quality of earnings: whether the profit is sustainable, which one-off items should be adjusted for, and what level of working capital the business normally needs.
• A forecast the buyer can test, with the assumptions written down and explained.
• Answers to the buyer's questions, usually a long list raised through the data room over a few weeks.
• Input on the price mechanism. Under completion accounts, the price is adjusted after the deal for the actual net debt and working capital at completion. Under a locked box, those figures are fixed at an earlier balance sheet date and the seller gives protection against value leaking out afterwards. Either way, the finance numbers change the amount the seller receives.

An owner can sometimes cover this with help from their accountant and corporate finance adviser. It is difficult to do while also running the business, and buyers notice when the only person who can answer finance questions is the owner.

Where the gaps usually show up

Due diligence tends to find the same problems in owner-managed businesses:

• Adjustments the owner thinks are obvious but has never documented, such as personal costs run through the company or an owner's salary that is above or below market rate.
• Revenue recognition on long contracts, common in engineering and project businesses, where profit has been recognised earlier or later than the work justifies.
• Stock valuation in manufacturing and distribution businesses.
• Working capital swings that nobody in the business has explained.
• Customer and product profitability that has never been measured.

When the buyer's accountants find these issues, the price or the terms usually move in the buyer's favour. A finance lead who has found and documented them beforehand can present them on the seller's terms, or fix them before the process starts.

Financial controller, finance director, or part-time FD

These roles solve different problems:

• A financial controller runs the accounting, the month-end close and the controls. This is the right hire when the main gap is the accuracy and timeliness of the numbers.
• A finance director does that work or oversees it, and adds forecasting, banking relationships, board reporting and leadership of the finance side of a transaction. This is the right hire when a sale or investment is likely within two to three years.
• A part-time or fractional FD gives a smaller business access to an experienced FD for a few days a month. It can work well as a bridge, but check how much time they can give during a sale process, which can be close to full time for several months.

Some businesses need a financial controller first to fix the basics and an FD later. Others need an FD who is willing to do much of the controller's work themselves for the first year.

What to look for in a pre-sale FD

• Sell-side transaction experience. Someone who has taken a business through at least one sale or investment process and knows what the buyer's accountants will ask.
• The ability to build and defend a forecast with the buyer's advisers.
• Comfort in a small team. In an owner-managed business the FD will often prepare the numbers personally, without a large department underneath.
• The standing to tell the owner things they do not want to hear about margins, cash or costs.

Candidates will also think about what happens to them after the sale. A trade buyer may already have a group finance director, and the role may not survive completion. The stronger candidates will raise this, and a completion bonus or retention arrangement is the usual way to address it. Take advice on the tax treatment of any arrangement before you offer it.

Timing

A buyer places more weight on numbers produced by a finance team that has been in place for some time. Ideally the FD should have produced at least one year-end and a full run of monthly accounts before the business goes to market. Allowing for a search of three to six months and a notice period, that means starting around 18 to 24 months before a planned sale.

Our piece on owner dependency and business valuation explains why buyers discount a business whose numbers only the owner understands, and the family business succession page shows where a finance appointment fits in the wider sequence of hires. We recruit finance directors as part of our succession recruitment work.