Many middle-market aerospace and defense companies come to a sale process with a capable bookkeeper or controller and an outside CPA who has prepared the company’s tax returns for years, but no chief financial officer. That arrangement can support a highly profitable business for decades. But it rarely will facilitate a successful sale of one. In Deal Note® 213, “The Bookkeeper,” we explained that a weak accounting team typically costs sellers 5–10% of price in due diligence. In Deal Note® 36, we explained why buyers pay more when a strong accounting professional stands behind the numbers. For most owners, the practical way to close that gap is a fractional CFO.

What Is A Fractional CFO? A fractional CFO is an experienced finance executive who works part-time, often one to three days a week, for a monthly fee. Often via remote access to your accounting systems. Fees run about $10,000 to $15,000 a month, truly a ‘fraction’ of the cost of a full-time CFO with similar experience.

Timing. We recommend hiring a fractional CFO a full year before starting the process of preparing for a sale. A CFO who arrives weeks before the sale process starts cannot vouch for numbers he or she did not help prepare, and buyers know it. A full year allows time to fix the month-end close, learn systems, and shore-up critical accounting policies and procedures like inventory reserves and cost accounting.

Qualifications. Look for actual sell-side transaction experience, not just operating experience. Familiarity with aerospace & defense helps, including government contract accounting, DFARS and FAA-regulations. A good candidate will also have substantial experience working alongside the QofE team, M&A counsel and M&A bankers.

Job Description. The fractional CFO builds reliable monthly reporting, prepares historical financials and projections by line of business (Deal Note® 88), and quarterbacks financial due diligence. He or she should support your controller, not replace them. The controller usually knows the history of where legacy financial data has come from, so we almost always recommend keeping that person and incentivizing them with a sale bonus (Deal Note® 94).

Disclosures. Buyers will ask who your CFO is and how long that person has been there. Be prepared to state plainly that you engaged a fractional CFO to prepare for the sale (Deal Note® 241). Buyers read it as discipline and commitment to a professionally managed sale process. If they discover it on their own, it raises questions about transparency.

Expectations. Set expectations clearly with your fractional CFO about post closing plans. Do they want the option of possibly working for the buyer? Do they expect a completion bonus? Do they intend to move-on after the sale?

If you want to discuss this topic, please call me at 914-414-4070. And if you have any suggestions for a future Deal Note topic, please let me know via email – wa@aldermanco.com.

Have a great day everyone,

William Alderman
Founding Partner