By Mark Ott, CFO Consultant, Next Stage Solutions, Inc. (NSS)

Previously I talked about How to Prepare Your Company for Sale and the need to get your historical financial information in order.  While potential buyers are certainly interested in how well your company has performed in the past, they are even more interested in how well you will perform going forward as this is what they are truly buying.  While no forecast is guaranteed, nothing will make a potential buyer more nervous than a rosy forecast that doesn’t hang together.

Prepare a Credible Forecast

Many things go into a sound financial forecast but here are a few key things to focus on:

• Sound historical financials – the past is often times a good indication of the future.  Dramatic changes in trends from the past to the future need to be explainable and believable.
• Detail your assumptions – capture each and every assumption and test them before you employ them in your forecast.  Be able to explain the assumptions and defend them.
• Test the logic built into your model – test it yourself, give it to a trusted colleague to test, give it to your accountant/financial advisor to test.  After you’re satisfied, give it one more test.
• Consider buying or subscribing to a forecasting tool – Many companies rely solely on Excel models.  I can almost guarantee you that there are flaws in any such models.  Using a forecasting tool can eliminate many of these flaws, make it simpler to import actual data, and make it far easier to do what-if scenarios.
• Presentation – Simpler is better. Prepare materials that are easy to read and understand and have supplemental charts, graphs, and more that drill down into more detail should questions come up.

Working on these points will go a long way to developing better forecast, budgets, and long range plans.  One other thing to keep in mind:  make sure you and your financial partner understand the projections thoroughly and can talk about them easily and freely.  No matter how sound they may be, if you’re unsure of yourself in front of potential investors, they will be wary of what you are telling them.

Next time we’ll talk a bit about why it may be helpful to enlist the help of professional people to help you sell (or buy) a company and when it is appropriate to do so.

If you are contemplating to sell your business, make sure to join our next NSS CEO Workshop on this topic on Tuesday, Nov 9, 2010

Join us for the Finance and Funding Options Panel

Date: Tuesday, September 21, 2010 | 7:30am – 9:30am

Place: WilmerHale Venture Group | 1100 Winter St

Bay Colony Corp Center | Center Entrance

4th Floor | Waltham, MA 02451

Exclusively for CEOs of revenue producing companies who are considering raising expansion capital. Come and meet the experts, learn what’s new and explore what type of financing or funding matches your needs. Lots of time for Q&A, so bring your questions.

Panelists:

Jane Braun, Silicon Valley Bank

Christopher Mirabile, Race Point Capital

Joan McArdle, Mass Capital Resource Company

Robin Lockwood, Flybridge Capital Partners

Moderator:

R. Lee Schindler, WilmerHale

Sponsored by Next Stage Solutions, Inc

Attendance is complimentary, but registration is required.  Call today 617-449-7728 or send an email info@nextstagesolutions.com. 

If you are running a company, Intangible Capital (IC) is a must read. This newly published book (2010) by Mary Adams and Michael Oleksak addresses the knowledge economy and its shortcomings in how we value corporations today. It is a provocative book, but an excellent read reflecting a deep understanding of how businesses work and how the intangible is becoming more important than the tangible. How do we account for that?

According to IC, only 30% of corporate assets are tangible, what about the rest? Knowledge assets are simply not measured, leaving 70% on the table. Today we have no good approach in how to account for the changes, not short term nor long term and certainly not in terms of inclusion in Financial Reporting. The book divides the knowledge intangibles into three classes of assets: human, relationship and structural capital and every chapter provides a set of tools.

Working with early stage companies, I often found push back from CEOs not wanting structure for their businesses, as it was viewed as a hindrance to innovation and entrepreneurial thinking. Intrigued by this fact, I wrote an article From Dissonance to Harmony to emphasize the importance of striking a balance between no structure and a hierarchical structure within the innovative community. I agree with the book that today’s business must have fluidity and flexibility and be an engine for ongoing learning, to allow for new thinking and better ways of problem solving from all employees with the ultimate goal to bring best value. Since the Google phenomena and vast technology advances, we have moved further into the knowledge economy. The authors were right on in suggesting leading as a conductor (horizontal) rather than the more traditional as the commander (vertical). I love that vision.

Another intangible asset is collective knowledge, a topic near and dear to me and how I believe Next Stage Solutions (NNS) is evolving. IC points out that markets coupled with technology today move so fast, that no one person can have all the information. This is certainly true in financial services where rules and regulations are changing almost daily. Within NSS, we work as a team of senior level financial experts exchanging ideas and solutions empowering each member to greater knowledge on behalf of our clients. The book explains how shared knowledge multiplies and emphasizes the necessity for value creation.

It continues to describe how it is imperative that a business today examines what its core competency is and looks at outsourcing all other aspects of a business. This leads in their opinion to the relevance of strong external partnerships or ‘relationship capital’ where what is not core to you is core to your partner, collectively creating a powerful engine, what the authors call a Knowledge Factory, displayed creatively with Legos in the book. The importance of networks and technology are significant facets of doing business.

All in all, I loved this book because it describes so well in how to think about a 21^st century business. It validates NSS’ approach in many aspects, but more importantly for me, it gives me tools and metrics in the continued development of our knowledge and innovation strategy. The Knowledge Factory demands that we look at our business holistically and all involved must be engaged. Only then does the collective knowledge fuel our economic engine.

Make sure to get a copy of Intangible Capital today. The flexible business model is here to stay. It includes a mapping of the networks, multiplicity of goals and benefits with bottom up thinking. Congratulations to Mary and Michael with the publication of this innovative and pioneering book, helping businesses look at intangibles in a better way for doing business today and the future. Let’s continue the discussion in how to account for intangibles in business valuations and in our financial reporting.

Title: Intangible Capital, 2010
Authors: Mary Adams and Michael Oleksak
Publisher: Praeger, Santa Barbara, CA
ISBN: 978-0-313-38074-7

Steve Dance is part of the NSS team.  He brings over 30 years of high level financial expertise in Life Sciences and High Tech. Steve has raised over $500MM in capital.

Most Satisfying: In your CFO work you have done in the past, what is the most satisfying feedback you got from the CEO?

That the CEO could always count on me to be calm and focused during a crisis.

Most Inventive: Given that as CFO we understand the importance of providing our clients with more than just accounting and financial reporting, share with us a project that truly made you a value creator.

The sale of one of my previous employers to a major biotechnology company was a complex process, with many potential obstacles arising during the negotiation and due diligence process.  As CFO, I was part of the negotiation team and provided the bulk of the due diligence materials.  I was responsible for resolving the many issues that came up during the sale process.  I believe I was able to establish a strong level of trust with the acquirer’s team and we were able to reach agreement on all the issues, and the sale was successfully concluded.

Most Positive: CFOs have different skill set, yet often we are viewed as one of the same.  Tell us a story where your actions made a powerful positive change and why.

I was CFO for a biotech company in California that had 300 employees, over 200 of whom were located in Europe, principally in Lyon, France, following a recent acquisition.  Since I speak French, I was able to establish good relations with the finance group in France, and ultimately the rest of the management team.  I played a key role in ensuring that the needs of the European team were met and consequently was appointed President of European Operations in addition to my CFO duties.  The good relationships that I built with the European organization also enabled me to negotiate successfully with the French labor union to avoid a workers’ strike that would have halted manufacturing.

Best Business Book: What should every CEO be reading going forward in this tepid economy?

The Wall Street Journal – still a great way even in this digital age to keep on top of what is happening in the business world.

Funniest Fact: Tell us something funny about you.

I was raised in Wimbledon, England and when I was a kid I used to go and watch the tennis at Wimbledon every year.  In those days the players used to walk through the crowds on their way to the courts.  One time I got too close to a player and he accidentally trod on my foot.  My foot was sore for days afterwards; the player won his match.

Laurie Taylor joined the NSS team recently.  He has over 20 years of experience and has worked with multiple start-up as Controller. We are delighted to have him on board.

Most Satisfying: In your CONTROLLER work you have done in the past, what is the most satisfying feedback you got from the CEO?

Nineteen out of twenty client companies have offered me a full time position during the engagement.

Most Inventive: Given that as CONTROLLER we understand the importance of providing our clients with more than just accounting and financial reporting, share with us a project that truly made you a value creator.

I began a two person project to determine why a major bank’s ATM conversion had an out of balance total of $19M after the merger of the two banking systems.   The bank booked a 200k reserve to cover this reconciliation exposure.  I requested a Bank Tiger team to assist my current consulting team and at the end of the project we had completely reconciled the account and were only unable to account for $9k in bank funds.  We also discovered a major systems glitch that was the result of the systems merger and trained the banking staff to recognize the problem and how to correct the system if it occurred again.

Most Positive: CONTROLLER’s have different skill set, yet often we are viewed as one of the same.  Tell us a story where your actions made a powerful positive change and why.

I was assigned a project to take over for a Director of Finance at a specialized moving van company.  I first determined that there was a massive amount of misspending going on and no one was managing the AR accounts.  In 6 weeks we were able to make enough corrections that company was stable enough for sale to a much better funded and staffed regional carrier.  The sale of this business unit saved 250 staff member’s jobs as a result of the merger instead of a company closure due to prior management neglect.

Best Business Book: What should every CEO be reading going forward in this tepid economy?

The Why of Work: How Great Leaders Build Abundant Organizations That Win by
David Ulrich and Wendy Ulrich

Funniest Fact: Tell us something funny about you.

I am crazy about WWII aircraft that have massively supercharged engines that “go fast, stay low, and turn left!” also known as the National Championship Air Races held each fall in Reno, NV.  The only rules are that these planes must have a prop and straight wings.

By Mark Ott, CFO Consultant, Next Stage Solutions, Inc. (NSS)

While the M&A market is fairly quiet as we enter the summer doldrums, it is a perfect time for owners and boards to think about what preparations can be made now in anticipation of selling a company when the market does open up.  Over the next several months, I will highlight some of the key financial issues that you should be thinking about and preparing for during this quiet period.

Are Your Historical Financials In Order?

In discussions with potential buyers, one potential red flag is a set of historical financials which doesn’t stand up to scrutiny.  You should have a complete set of financial statements (Income Statement, Balance Sheet, Cash Flow) for the previous three years (two minimum) which have either been reviewed by or, better yet, certified by outside auditors as well as unaudited interim financials for the current year.  If your accounting is currently on a cash basis, you should consider changing to an accrual basis (after consulting with your tax advisor) and it would be advisable to ensure that your accounting is in compliance with GAAP (Generally Accepted Accounting Principles).

Most companies have someone in house to do their bookkeeping but it is wise to have an independent company like Next Stage Solutions (NSS) come in and review the historical financials and get them in good shape.  NSS has strategic-thinking CFO’s who have experience in leading companies through the M&A process.  Their participation in this phase will actually pay for itself to some degree as it will reduce the cost of the review/audit by the outside audit firm and accelerate the process.  Furthermore, you cannot use the same firm to prepare the financials and then audit/review them.

One other good reason to have sound historical financials is that they will better enable you to Prepare a Credible Forecast which will be the subject of my next article.

Mark Ott joined Next Stage Solutions this Spring.  Read on to see what Mark has been up to – he has a great story to tell!

Most Satisfying: In your CFO work you have done in the past, what is the most satisfying feedback you got from the CEO?

The most satisfying feedback I received is when the CEO told me that he knew he could spend a considerable amount of time out of the office (with customers, investors, board members, press, etc.) knowing that everything back at headquarters was being looked after with me looking after things.

Most Inventive: Given that as CFO we understand the importance of providing our clients with more than just accounting and financial reporting, share with us a project that truly made you a value creator.

When we moved a company from California to Massachusetts, I had to build a complete infrastructure pretty much from the ground up.  This included the recruitment/interviewing and engagement/hiring of new corporate attorneys, external auditors, Accounting Manager, Office Manager, and Human Resources Manager as well as establishing new banking relationships and corporate insurance programs.  All of this had to be done in a matter of three months.

Most Positive: CFOs have different skill set, yet often we are viewed as one of the same.  Tell us a story where your actions made a powerful positive change and why.

When I was European Controller for a large networking company, I had eight country controllers reporting to me.  Some of the countries (like the UK and Germany) were larger contributors to the results of the overall operation than others (like Spain and Sweden).  In that environment the controllers for the larger countries tended to be more influential in group decisions and the controllers for the smaller countries would sit back and complain that their needs were always overlooked because of their size.  This ultimately led to a team that did not work very well together and this was reinforced by pre-existing cultural differences.  One of the things I did to turn this around was to solicit ideas from the controllers concerning topics to be covered in an upcoming quarterly staff meeting.  When the time for the meeting came, I appointed the controller who suggested the topic as the leader of the discussion leader and subsequent action items.  This forced the smaller countries to play a much more active role in the group in identifying their issues and forced the larger countries to sit up and listen and help find solutions as they were cast in more of a “follower” role.  Following this pattern in subsequent staff meeting resulted in a much more cohesive pan-European staff.

Best Business Book: What should every CEO be reading going forward in this tepid economy?

“Leadership in the Era of Economic Uncertainty:  The New Rules for Getting the Right Things Done in Difficult Times” by Ram Charan, McGraw-Hill.

Funniest Fact: Tell us something funny about you.

My fraternity brothers used to call me “Howard”, which is my middle name.  They thought that it was an “amusing” middle name, so they thought they could get me going if they kept calling me by that name.  It worked for a while but the nickname stuck throughout college and they will even use it today in those rare occasions when we get together.

Stay tuned for our next team member’s story!

Window of Opportunity | One Month!

Program Highlights:

• Life Science companies with fewer than 250 FTEs eligible
• Project expense years: 2009 and 2010
• Maximum cash or credit amount: $5M
• Multiple projects/applications can be submitted
• Forms and Instructions are now available
• Application decisions will be made within 30 days
• Applications are due no later than 21 July 2010

Introduction:

One of the results of the Health Care Reform Bill was the appropriation of a poll of $1 Billion in tax credits or grants to support the costs of research by small and mid-size life sciences companies paid or incurred in 2009 and 2010. This program is advantageous for companies without income tax liability.

Subject to some exceptions, the QTDP (Qualifying Therapeutic Discovery Project) credit or grant is available to any business with 250 or fewer employees at the time the application is submitted. No applicant will be allocated more than $5 million in QTDP tax credits or cash grants and because of the wide open application process most winning projects will receive less than the requested amount and completion is expected to be very intense.

Applicants will choose between the tax credit and cash grant during the application process.

The final deadline for application submission is 21 July 2010 and submissions after this date will not be considered.

Application Process and Selection Criteria

Life sciences companies must apply to the Treasury Department for an allocation from this incentive pool using IRS Form 8942. The Treasury will approve or deny applications within 30 days of submission.

A QTDP is a project designed to achieve any of the following objectives:

• To treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, and clinical studies, or carrying out research protocols, for the purpose of securing approval of a product by the Food & Drug Administration or Public Health Service,
• To diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions, or
• To develop a product, process, or technology to further the delivery or administration of therapeutics.

In addition to the life science component of the selection process the financial impact of the QTDP will be reviewed to determine which submissions will likely:

• create and sustain (directly or indirectly) “high-quality, high-paying” jobs in the U.S., and
• advance U.S. competitiveness in the fields of life, biological, and medical sciences.

The following entities are not eligible for this program:

• Foreign businesses unless more than 50% of their income from the relevant project is subject to U.S. federal income tax,
• Federal, state, or local governments,
• Tax-exempt organizations,
• Partnerships or
• Other pass-through entities.

Additionally, the following are not eligible project expenses: CEO and other officer’s compensation, interest expense, facility maintenance expenses, service costs or such costs as determined by the IRS.

The QTDP credits and grants are subject to recapture if the patents or other resulting property are transferred within five years.

An applicant must complete a separate IRS Form 8942 for each QTDP for which it is seeking a QTDP tax credit or cash grant and this form is due for release 18 June 2010.

The following is a summary of the QTDP Credit Project Credit established in by the Health Care Reform and by IRS Notice 2010-45.  Interested applicants should thoroughly review IRS instructions and form 8942.

Please feel free to contact Lauriston Taylor at Next Stage Solutions; if we may assist you in any way.

Lauriston Taylor, Controller Consultant

o:  617. 449.7728, x-712

c:  978. 397.6412

f:   978. 339.5202

The GPS of Finance

IBM just published an extensive and insightful study about the global chief financial officer.  The 2010 IBM Global CFO Study reveals the importance of the CFO role today and how a financial advisor must be broader and more strategic. It surveyed 1900+ CFOs worldwide from a cross section of enterprise sizes.

Today’s CFO must bring a broad understanding for a business, more than ever.  Figure 1 shows the significant changes over the last 5 years on the importance of five company-wide activities. Notice the largest changes are around managing and mitigating risk (93% increase) and integrating information across the enterprise at 109% increase.

Figure 1

The study defines the CFOs into four groups:

1. Value Integrators
2. Disciplined Operators
3. Constrained Advisors
4. Scorekeepers

It evaluates the effectiveness of all four in multiple subject matters and shows the gap or discrepancy between the different styles.  For simplicity, we compare the two opposites, that of the Value Integrator and the Scorekeeper.   The Scorekeeper is defined as a CFO focusing primarily on financial reporting, compliance and accounting with some budgeting and forecasting.

The Value Integrator is viewed as a CFO who continuously improves the finance efficiency and provides broad business insights to the business.  They use technology to achieve greater data accuracy and develop better analytical tools for forecasting and scenario planning. Value Integrators understand the importance of managing enterprise risk and opportunities.  This study points out that Value Integrators consistently outperform the other 3 groups and have provided significant security to businesses in this recent downturn.

Figure 2 shows the 5-year effect most significantly around EBITDA, where the difference is more than 20X. Value Integrators also outperform on the REVENUE and ROIC side, with 49% and 30%, respectively.  These numbers are indeed noteworthy, the differences are truly impressive.

Figure 2

Multiple financial measures in this study are evaluated (see figure 3) and most impressively, Value Integrators achieved sustainability within their companies despite the economic recession.  The study also evaluates enterprise-focused effectiveness and how expectations versus executions show a widening gap. One of the larger gaps (34%) is integration of information across enterprises.  Today’s CFO must integrate information to understand which metrics are important and how often: weekly, daily or realtime.  Proactive CEOs demand proactive data support from their financial team.

Figure 3

The two key capabilities associated with the outperformance of the Value Integrator are:

1. Finance  efficiency – provides business-relevant information and strong analytics based on good data
2. Business Insight – enterprise focused  and risk-based decision making support in a timely manner

Figure 4 shows how Value Integrators outperformed on all aspects of CFO responsibilities.  Using Scorekeepers as the baseline, it is hard to avoid noticing the alarming difference between Scorekeepers and Value Integrators. Very importantly, combining the skill set of finance and enterprise knowledge has a multiplier effect and separates the Value Integrator by a large margin. Finance and risk are embedded in the company.  Risk management and opportunities are in fact a big focus for a forward looking CFO. The support and overall contributions from a CFO to an enterprise are becoming increasingly strategic.

Figure 4

Clearly CFOs need to master and control all tactical aspects of finance.  Historic data provides you with a historical view.  A current view is represented by financial dashboards important to all decision-making.  The forward looking view is vitally important for ongoing sustainability and growth of a business.  Only with the understanding and support of all three can the CFO be truly pro-active in the decision-making process, scenario planning, forecasting and risk management and mitigation.  The new, strategic CFO must possess the expertise and skill set in support of the CEO (figure 5).

Figure 5

The strong emphasis on tactical finance for the past 10 years is partly due to Sarbanes-Oxley.  CFOs have continuously been transaction driven leaving a significant gap between actual and aspiration (see figure 6).  CFOs continue to spend half their time around transactional processing.  NSS thinks that the future mix should be:

40% Decision-support
30% Transactional
30% Control

Today’s economic landscape demands increased worldliness, intellect and knowledge from CEOs and CFOs. This combination gives the CFO more enterprise wide responsibilities as a trusted business partner who understands finance, connects the dots, brings micro- and macroeconomic knowledge and is market and industry savvy.

Figure 6

NSS is interested in your feedback and in how you have navigated through this recession.  The 2010 IBM Global CFO Study shows powerful statistics in support of a Value Integrator as a CFO and why it is so important to drive your business in that direction.  Give us a call to discuss further in how we may support you and your business with our value driven strategic CFO focus and strong ROI.

Rudi Scheiber-Kurtz, CEO
Next Stage Solutions, Inc.
The GPS of Finance