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Role of the CFO in M&A Transactions

The primary determinant of price in the purchase of a company in the middle market of the aerospace and defense industry is the buyer’s expectation of the prospects for the business.  Whether using a discounted cash flow approach or a return on invested capital, potential buyers will zero in on the expected financial performance of a company over the coming five years when arriving at the price they are willing to offer.

To assess the prospects for a business, buyers will usually focus primarily on three factors:

  1. Outlook for the specific market segment.
  2. The company’s past performance and future strategy.
  3. The quality and consistency of the financial data presented by the seller.

The Chief Financial Officer of a business is responsible for the accuracy and proper presentation of the financial reports and supporting data.  In this role, the CFO’s skill level will have a strong impact, positively or negatively, on the degree of confidence a buyer will have in the historical financial data and future projections.  A competent and knowledgeable CFO will give buyers confidence and facilitate a favorable transaction. The converse is also true.  A weak CFO, who is unable to earn buyers’ confidence in the financial statements and projections, will give buyers cause for concern which can lead to a reduction in price or a failed transaction.

Many smaller aerospace and defense companies do not have a CFO per se, but rather have a controller or bookkeeper as their most senior financial manager.  This is not a fatal flaw, so long as this individual keeps accurate records, presents logical analyses, is an effective communicator, is on the ‘deal team’ from the start of the process and is supported by a respected independent accounting firm.  Again, the key is to earn the trust and confidence of potential buyers as they examine the financial records and future projections.

During our 21 years selling aerospace and defense companies we have seen all manner of financial and accounting leadership within the firms we have sold. Surprisingly, we’ve learned it doesn’t matter if that person has the title of CFO or Bookkeeper. What really matters is that they are a good communicator, their data is always consistent and substantiated, and overall they give the buyer confidence that the historical financial records are accurate and the projections are reasonable.

Have a great day everyone.

Kevin Gould
Managing Director, Aerospace