Company mergers and acquisitions – or M&A – can bring a mix of excitement, hope, and maybe some worry to the leaders of a business. These deals offer big opportunities to grow, reach new customers, or get ahead of competitors. But frankly speaking, they’re also very complicated and full of possible problems. When a company is going through this high-pressure situation, one figure stands out as absolutely key to guiding the company through the difficult process of M&A: the Chief Financial Officer.
A CFO does a lot more in M&A than just crunch with numbers. Of course, being good with finances is a basic part of their job. But these days, a CFO also has to be a planner, someone who digs for information, a deal-maker, someone who helps put things together, and a good communicator throughout the M&A process. We will look at all the important things a CFO does, from the first thought of an acquisition to the hard work of making it succeed long after the deal is signed.
We’ve talked about it in length in our in-depth guide, but basically, before anyone shakes hands or signs papers, there’s a lot of work to do beforehand. This is when the CFO’s ability to plan ahead and analyze information becomes really important. Jumping into a deal without good preparation is likely to cause problems, and the CFO is important for creating a good start.
Figuring Out The “Why”
Buying another company shouldn’t just be about growing larger; it has to fit the business’s overall strategy. The CFO has a big say in deciding how the company will handle M&A, making sure it fits with the company’s main goals. This means asking and answering some hard questions:
- What do we want to get from this purchase (like entering new markets, getting new technology, removing a competitor, or saving costs by being bigger)?
- How does this kind of acquisition fit into our long-term financial plan?
- What are the things we absolutely need, and what would make us walk away from a deal?
Screening Companies
After the “why” is clear, the company starts looking for other businesses to potentially buy. The CFO helps set financial and business standards to check these companies. This means looking at more than just a company’s balance sheet and P&L. It means knowing more about:
- How good and steady their income is: Is the income regular? Do they depend too much on a few customers?
- How their profits are changing: Are their profit margins going up, staying the same, or going down? What are the reasons behind these changes?
- How good their financial position is: How much money do they owe? Are there any hidden debts to think about?
- How much cash the company makes: Does the target company regularly bring in a good amount of cash?
- Synergy potentials: Where are the realistic opportunities to save costs or grow revenue by combining the two businesses? This is a big one, and we’ll come back to it.
M&A Scorecard:
To keep the search on track and fair, it helps to make a clear scorecard. This scorecard can list specific financial and non-financial things that describe the ideal company to buy, giving different levels of importance to each. For instance, points could be given for “Percentage of Regular Income,” “Profit Margin,” “How Many Customers Stay,” and “How Well the Company Cultures Fit.”
It’s also a good move to set limits early on. Figure out how much your company can afford for a purchase. What’s the highest price you’re willing to pay? How will you get the money? Knowing these limits from the start stops the company from wasting time and money on targets that aren’t a good fit.
A First Look at the Finances
When a possible company to buy is found, the CFO often leads an early financial check. This isn’t the complete, detailed financial health check.yet. It’s more like a quick look to see if it’s worth spending more time on this company. The idea is to quickly find any clear warning signs (aka red flags) or things that would stop the deal before spending a lot of time and money.
This might mean looking at information available to everyone (if the company is publicly traded), reports about the industry, and any early information the seller provides. The main question is: Does this company, just from a first look, seem to be what it says it is? Are there any big differences in its financial story?
A good way to do this is to check their claims against public information and what’s normal for the industry. For example, if a private company says its profit margins are much higher than all its public competitors, that needs a closer look.
It can also be helpful to have a short checklist of important financial signs and possible red flags (like falling income, quickly growing debt, not turning sales into cash well, or concerns from their accountant, if known). This helps to sort through possible companies quickly.
Putting Together Your M&A Team
No CFO, no matter how smart, can manage an M&A deal by themselves. It takes a team. The CFO is important in putting together the people from inside the company and outside experts needed to do the work.
- Internal Team: This usually includes key people from your finance planning group, who are very much needed for creating models and analyzing information. You’ll also need help from legal, HR, operations, and IT, depending on what kind of company you’re looking at.
- External Advisors: For most deals, you’ll need outside help. This can include:
- Investment Bankers: To help find companies, discuss terms, and set up the deal.
- Lawyers: For checking legal details, writing contracts, and making sure rules are followed.
- Accountants/Consultants: For special financial checks (like reports on the Quality of Earnings), tax advice, and sometimes checks on operations or IT.
From the beginning, it’s important to set clear jobs and duties for everyone on the internal team and for all outside advisors. Who is in charge of what? Who does each person report to? This stops confusion and people doing the same work twice.
When choosing external advisors, check them carefully. Don’t just pick the first one you hear about. Ask for recommendations, check their past work, and talk to several firms. Ask about their specific experience in your industry and with deals like the one you’re considering. Make sure you understand how they charge for their work before you start.
At AG Capital CFO, we’ve helped companies across Europe and the US execute M&A deals—from buyer identification and deal structuring to due diligence and post-merger integration. Contact us for a free, no-obligation consultation.
Due Diligence: Taking a Closer Look
Once a good potential company has been found and often a first agreement (like a letter of intent) is signed, it’s time for due diligence. This is when the CFO and their team get to work and carefully look at every part of the target company. The aim is to check what the seller says, find any hidden risks or debts, and really get to know the business you might be buying. Surprises after the deal closes are usually not good.
Checking the Finances (Where the CFO Excels)
This is naturally where the CFO really shines. Financial due diligence (FDD) is a very detailed look at the target company’s financials. It’s about making sure the financial information they give is correct, sustainable, and is a good foundation for figuring out the price and making future plans. Important things to look at include:
- Quality of Earnings (QoE): This is very important. A QoE check tries to find out the target’s “real,” ongoing profit. It means adjusting the reported profit for anything that only happened once, was not normal, or was due to different accounting rules. For instance, if the target made a lot of money one time from selling an asset, that needs to be removed to see the real profit from regular business.
- Net Working Capital (NWC): Understanding how the target company manages its short-term money (money owed by customers, goods in stock, money owed to suppliers) is essential. You need to figure out a “normal” level of NWC and make sure the purchase agreement protects you from the seller trying to make things look better right before the deal (like aggressively collecting receivables very quickly or stretching payables right before closing).
- Debt and Debt-Like Items: A careful review of all loan agreements, including covenants and how they need to be paid back. It’s also important to find any obligations that might not be listed as traditional debt but will still cost money (like underfunded pensions, or large amounts of deferred revenue that won’t convert to cash).
- Spending on Long-Term Assets (CapEx): Is the target spending enough on its assets to keep the business running and support growth? Or have they been spending too little, which will mean a big CapEx burden for you later?
- Forecast Reliability: It’s important to check the ideas behind the target’s financial projections. Are they realistic? Do past results and market conditions support them? The CFO needs to question these things carefully.
To make sure all key areas are checked, it’s a good idea to create and use a detailed FDD checklist made for the specific company and industry, rather than just relying on memory.
When looking at profits, always try to “normalize” them. What are the profits that are likely to continue? Ask “why” over and over to understand strange differences.
Take the target company’s financial forecast and test the main assumptions. What happens if sales don’t grow as much as expected? What if key costs go up? This helps you understand the possible downsides.
If you need help with stress-testing models, give us a quick call and we will give you the expertise tailored for you.
Operational and Commercial Due Diligence
The CFO might not look at factories themselves or talk to customers, but they need to make sure that the due diligence on operations are conducted thoroughly, and that everyone understands what these mean for the money. This includes:
- Understanding How It Works: How does the target company actually make its product or provide its service? Are its processes efficient? Are there any problems that slow things down or create risks?
- Customer Analysis: Who are the main customers? Do they rely too much on a few big ones? How many customers are leaving? What do customers think of the company?
- Supplier Relationships: Do they depend too much on certain suppliers? Are their contracts favorable?
- Market Position: How good is the target’s position against competitors? What are the trends in their market?
- Information Systems and Infrastructure: Are the target’s IT systems able to work with yours? Are they secure and can they grow with the business? An outdated or incompatible information system can be a huge, expensive problem post-acquisition.
- Legal and Regulatory Compliance: Are there any current legal cases, problems with regulations, or areas where rules aren’t being followed?
The CFO’s job is to make sure that what’s found in these areas is understood in terms of money. For instance, if they rely on a few big customers, what’s the financial risk if a key customer leaves?
It’s helpful for the CFO to work very closely with the Chief Operating Officer (COO) and other operations leaders. They know the technical details, and the CFO can help understand the financial side of what they find.
Always ask “what if” questions about what’s found in operations and business checks to figure out the possible financial effects. For example, “What if their biggest customer orders 20% less? How does that change our income and profit forecasts?”
Synergy Validation: From Hope to Reality
Synergies – the good things expected from combining two companies – are often a big reason for the price of an acquisition. These can be ways to save money (like combining offices, cutting jobs that are the same, or getting better deals when buying things) or ways to increase income (like selling one company’s products to the other’s customers, or entering new markets).
One example of an M&A deal that delivered strong synergy is Disney’s acquisition of Pixar in 2006. Disney bought Pixar Animation Studios for about $7.4 billion, and the synergy came from blending creativity, brand strength, and technology. It worked well because Pixar brought unmatched storytelling and animation innovation, while Disney contributed global distribution, licensing power, and a strong brand. This deal gave birth to blockbuster movies like Toy Story 3, Coco, and Inside Out, etc. which became box-office successes and merchandising giants.
The CFO’s job is to bring a very realistic view to synergy guesses. It’s easy for teams working on the deal to get too hopeful. The CFO must:
- Question the Assumptions: Are the synergy guesses based on careful, specific review, or are they just rough estimates?
- Asses Achievability: How easy or hard will it be to really achieve these synergies? What are the risks and costs (e.g., severance costs for headcount reductions, IT integration costs)?
- Assign Ownership: Who will make sure each specific synergy happens after the deal is closed?
Under-delivering on synergies is a common reason M&A deals don’t add value. Careful checking beforehand is very important.
To do this well, break down synergies into specific, measurable types (like “savings from duplicate software,” “savings from integrating production or manufacturing raw materials,” “revenue from cross-selling Product X to Target’s Customer Segment Y”). Give each a dollar value, a timeline, and how likely it is to happen.
For big synergies, make sure there’s a detailed, specific plan. For example, if you expect to save money from cutting jobs, list the exact jobs and how much they cost.
Also, remember that sometimes combining companies can lead to unexpected negative outcomes – extra costs or lost income. Try to identify these too.
Valuation and Negotiation
With all the information from the detailed checks, the next part is figuring out what the target company is worth and discussing the terms of the deal. The CFO is central to this, making sure the company pays a fair price and sets up the deal in a good way for its finances.
Pricing Models: Art or Science?
As stated in our previous article, figuring out a company’s worth is often said to be part art, part science. The CFO supervises or helps build the financial plans that are the basis for the price. Common ways to set a price include:
- Discounted Cash Flow (DCF): Estimating the future money the target company will make and figuring out what it’s worth today. This depends a lot on the ideas from the detailed checks (like growth rates, profit margins, spending on long-term assets) and the rate used to calculate today’s value (often a company’s average cost of funding).
- Comparable Analysis (“Comps”): Looking at financial ratios used for pricing (like Price to Earnings) of publicly traded companies that are like the target.
- Precedent Transaction Analysis (“Precedents”): Checking the prices paid in past acquisitions of similar companies.
The CFO’s job is to make sure these models are built on good, strong assumptions that reflect all the information found during the due diligence. The price estimate is only as good as the information used to make it.
It’s very important to always check how changes in key numbers (like growth rates, discount rates, synergy ideas, and end-of-period values) affect the price, not just relying on one price estimate. This shows how the valuation changes if your assumptions are slightly off and helps establish a valuation range.
Based on your valuation and what you want to achieve, decide the highest price you are willing to pay, or your “Walk-Away” price, and stick to it. Getting too excited about a deal can lead to bad decisions.
Need help from experts for valuing your business? Contact us for a free consultation.
How the Deal is Set Up and Paid For
How the deal is put together has a significant financial, taxes, and operational impact. The CFO gives important thoughts on:
- How It Will Be Paid For: Will it be all cash, all company shares, or a mix of both? Each choice affects the buyer’s financial statement, earnings-per-share (EPS), and who owns the company.
- Earn-Outs: These are future payments to the seller based on the target achieving certain performance milestones post-acquisition. CFOs need to figure out the possible effects of these payments and make sure the goals are clear and can be measured.
- Changes to the Price Based on Short-Term Funds (Working Capital Adjustments): This is a common part of purchase agreements. It’s a way to change the final price depending on the target’s actual short-term money at the end, compared to a set amount. The CFO needs to make sure the target Net Working Capital is fair and that how it’s calculated is easy to understand.
- Getting the Money: If the deal needs external financing, the CFO is in charge of getting it, whether by borrowing (from banks or by selling bonds) or by selling shares. This involves preparing presentations for lenders/investors and negotiating terms.
- Effects on Taxes: Different deal structures have different tax consequences for both the buyer and the seller. The CFO works closely with tax advisors to understand these implications and structure the deal in the most tax-efficient way possible.
It’s useful to create financial plans that show the effect of different deal setups (like cash versus shares, or different amounts of borrowed money) on your company’s expected financial statements and important financial numbers after the deal.
Talk to tax experts from the start and throughout the process because tax issues in M&A can be very complicated. Don’t wait until the last minute.
While you are looking out for your company’s best interests, try to understand what’s important to the seller (like how they want the deal treated for taxes, or if they want to stay involved). This can help find answers that work for everyone.
Post-Merger Integration (PMI): Putting It All Together
Signing the deal is a big achievement, but it’s not over yet. In some ways, the most difficult part is just starting: integrating the acquired company. Poor integration is one of the primary reasons M&A deals fail to deliver their promised value. The CFO has an important job in guiding and watching over the money side of this very important time.
While integration is a company-wide effort, the CFO leads the work of combining finances. This is the main thing that helps the new, joined company work well. Key tasks include:
- Financial Systems Integration: This is a huge one. Deciding whether to move the bought company to your systems, use both systems for a while, or choose a completely new system. This involves planning, moving information, checking it, and teaching people how to use it. It’s often difficult and can be expensive if not handled carefully.
- Synergy Realization: Remember all those expected benefits (synergies) you found and checked? Now it’s time to achieve them. The CFO sets up ways to check if both cost savings and new income are happening compared to what was planned. This needs clear ways to measure, regular updates, and making sure people do their jobs.
- Controlling Merger Costs: Combining companies is expensive (for example, paying people who leave, combining systems, creating a new brand, and fees for external advisors). The CFO needs to plan for these costs and check how much is actually spent compared to the plan.
- Establishing New Financial Reporting and Controls: The combined entity will need unified financial reporting processes, consistent accounting policies, and robust internal controls. The CFO oversees the design and implementation of these.
- Cash Flow Management: During the time of combining, it’s hard to know how much money will be available. The CFO needs to carefully watch cash, handle short-term money well, and make sure there’s enough cash on hand. If you need a CFO crash-course on managing cash flow, check out our previous article about it.
A good step is to make a 100-day plan for combining finances. What really needs to be done in the first 100 days from a financial perspective? Focus on important things like getting control of money, making sure reports match, and starting to check on synergy.
For any big purchase, think about setting up a special team or group (sometimes called a Project Management Office or PMO) to manage the combining process. This team should have people from finance, IT, HR, and operations. The CFO will likely support or help lead this team.
To track progress, use clear measures for combining the companies and for the expected benefits. It’s important to measure progress to manage it well. Define important measures (Key Performance Indicators or KPIs) to check how things are going against the plan and the benefit targets. Check these often.
It's More Than Just Numbers
Going through a merger or acquisition is a lot of work for any Chief Financial Officer. It requires a remarkable blend of deep financial expertise, sharp analytical skills, sound judgment, and strong leadership. From helping form the first thoughts of M&A, through the hard work of checking everything and making the deal, and into the complexities of putting the companies together afterwards, the CFO is always there, helping to lead.
The CFO’s job is not confined to spreadsheets and financial models. They are a key person the CEO can talk to for ideas, someone who questions ideas to make them better, a protector of the company’s financial situation, and an important person in making sure the deal brings the benefits it promised. By understanding the breadth and depth of these responsibilities, and by preparing diligently for each phase, CFOs can greatly affect whether an M&A deal turns out well or becomes a warning story. The stakes are high, but with the right approach, so are the potential rewards.
AG Capital provides fractional CFO services and Financial Planning and Analysis (FP&A) services to small and mid-size companies in the US, UK, EU and globally, including budgeting, profitability analysis, cost analysis, investment projections, and a cash flow planning. The company thrives in offering high-level financial expertise and leadership to businesses on a part-time or project basis.