Midmarket CFOs get pulled in so many directions that the question of what to spend time on often comes down to impact. Dustin Williamson, a fractional CFO and managing director of VCFO, says a suitable mantra for such CFOs is, “If an action doesn’t drive value, delegate or defer it.”
Value creation may be top of mind if an owner or investor exit is looming, but otherwise, more immediate concerns can obscure it. Earnings matter, but the most powerful value creation may come from uncovering hidden opportunities.
Williamson has guided many middle-market companies through this terrain. He spoke with us about focusing on enterprise value creation, spotting common blind spots in the journey to growth and reassessing financial plans and capital structures during periods of macroeconomic pressure.
CEOs and boards expect finance chiefs to play a strategic role beyond finance. How do you balance operational financial leadership with broader business strategy?
Limited resources make achieving the balance more challenging. First, delegate day-to-day accounting and reporting to a capable controller or finance team. Second, communicate. Reserve time weekly for strategy sessions and cross-functional collaboration, and seek out individuals with spare capacity or, more importantly, overcapacity issues.
Third, leverage data analytics to link operational metrics with strategic KPIs. Making complex calculations and numbers understandable to all interested and relevant parties is a critical CFO function.
“Frequently, we find that the financial person at the helm of a lower middle-market company has lost sight of the forest for the trees.”
Frequently, we find that the financial person at the helm of a lower middle-market company has lost sight of the forest for the trees. The numbers may make sense to that person, but no one else gets them. In an M&A situation, that causes an instant credibility vacuum.
What is the best way to boost enterprise value creation, and where are the blind spots in financial strategy that hinder long-term business growth?
As a CFO navigates the path of highest determinable enterprise value, several focus areas should be integral to the playbook, regardless of industry.
First, revenue quality: recurring versus one-time. Second, margin expansion through operational efficiency. Third, working capital management and cash conversion. Lastly, we are building a scalable infrastructure to support future growth.
Common blind spots in the value-building process include, but are not limited to, underestimating the impact of customer concentration, neglecting digital transformation and automation for productivity enhancements, focusing only on EBITDA and gross margins while ignoring quality-of-earnings factors and, most importantly, not aligning financial planning with strategic goals, resulting in errors like capital misallocation.
CFOs interested in building long-term sustainable value in their companies tend to prioritize the value enhancements in all that they focus on and do. At the same time, they navigate away from or minimize the blind spots. Measurement is essential for the CFO to communicate daily, weekly and monthly progress to building value. It is also critical to capture this progress through regular value driver analysis and readiness assessments, even if a sale isn’t imminent.
With economic uncertainty, inflationary pressures and escalating political risk, how should CFOs reassess their financial planning and capital structure?
CFOs should be well-versed in building financial models to evaluate if/then strategic actions; this is standard practice. Here’s what takes this type of financial planning to the next level:
- Dynamic forecasting. Move beyond static annual budgets by implementing rolling forecasts and scenario planning.
- Stress testing. Model best, base and worst-case outcomes to guide decisions around liquidity and debt covenants.
- Capital structure reorganization. Reevaluate debt levels and terms; hedge interest rate exposure if appropriate. Consider non-dilutive capital or alternative financing to preserve flexibility.
Inflation is here to stay [in the short term]. That makes it an opportune time to identify a structured cost pass-through strategy, review pricing elasticity, renegotiate supplier terms and optimize inventory.
The role of the CFO in M&A and exit planning has never been more critical. What advice do you have for CFOs guiding their business through a sale or acquisition?
First and foremost, start early. Exit readiness should be an ongoing process, not a fire drill. Clean books, documented processes and strong internal controls matter. I have never heard anyone say that they should not have started so early—ever!
The CFO drives the narrative. They play a central role in shaping the company’s story during diligence, knowing the numbers and what they say. If you fail at this, even if the transaction succeeds, the buyer will replace you.
In addition to the value enhancement focus items discussed above, it is up to the CFO to normalize earnings and remove non-recurring items, or to coordinate and engage for a quality of earnings study performed by an outside advisor. That is essential for winning the buyer’s trust in the business’ cash flows.
In buy-side deals, identifying synergies and integration risks is essential. The deal does not stop at signature; that is when the real work begins.
The CFO serves as the anchor between the company’s legal, tax and transaction advisors; however, they shouldn’t outsource ownership of the outcome. Lower-middle-market CFOs in particular must recognize and understand that buyers scrutinize risk more closely in smaller deals, but strong CFO leadership can significantly increase deal certainty and valuation.
