In a conversation presented at the 2023 MAPP (Manufacturers Association for Plastics Processors) Finance Forum, Steve Simone, Vice President in Stout’s Investment Banking group, spoke with two CFOs on their experiences selling their companies.

The panelists included:

• Keith Ekenseair (former CFO of PolyTech)
• Brian Simchik (CFO of Oneida)

Transcript edited for length and clarity.

Key Value Drivers

Simone: When you marketed your companies to prospective buyers, what were key value drivers and differentiators?

Ekenseair: Our company’s historical growth, prospective growth, and industry margins were key value drivers. Additionally, our experienced management team and their ability to operate the business after the sale appealed to potential buyers.

Simchik: As a contract molder, we developed a good reputation in the firearms component industry. Our engineering staff also developed good relationships with the engineers on theproduct development side for our customers.

The stickiness in our customer base helped us a lot in the process. We had many long-standing relationships with a few recent add-ons. We could show buyers those customer relationships and show there was still a market to be had. We also had a strong management team and good systems.

Quality of Earnings

Simone: Did you hire a third party to perform a quality-of-earnings (QoE) assessment? Did the buyer hire an accounting firm for a buy-side QoE assessment?

Ekenseair: Because our company was small and privately owned, we had not had historical audited financials. But we had a strong controller, and with myself as the CFO, we had quality financial information.

Still, based on Stout’s recommendation, we felt that a QoE assessment would enhance our financial data presentation to a prospective buyer. So we hired a third-party CPA firm to conduct the QoE analysis for our company.

This proved invaluable through the sales process. It shortened the due diligence, and allowed justification and quantification of any add-backs since those add-backs were part of the QoE process. Having a third party effectively sign off on any of those adjustments was valuable.

Our buyer did not perform a separate QoE analysis, as they felt comfortable with the company we had hired. All the information was very transparent, and the buyers knew the integrity of how we operated. They trusted our financial data but still did due diligence when they felt it was appropriate.

Simchik: We had annual audited financial statements, but we did end up doing a QoE report as well. It wasn’t as broad or complete as a regular audit, but it was extremely in depth on the profit and loss side, and especially on the add-backs.

Our buyers did not perform their own QoE, though they did have an accounting firm look at everything. I had gone through this process before, but not with a QoE, and it definitely helped in the due diligence process. The strength and thoroughness of that report provided comfort to the buyers. They went through necessary due diligence, but it was less than it would have been otherwise.

The CFO’s Role

Simone: As a CFO, what were your responsibilities throughout the transaction process?

Simchik: The internal knowledge of the transaction was limited to myself and our CEO, so our accounting staff and HR personnel were unaware. These days, due diligence can be conducted remotely without anyone coming to our location, which made it easier to keep it confidential. However, this also meant that I was responsible for handling 80% of the data used for the QoE report and any later due diligence questions.

To streamline the process, I aligned our monthly closing process, with a few exceptions, to mirror what we do for a year-end audit. This involved analyzing the balance sheet and all accounts every month. Once we established a routine, it became less time-consuming. Our efficient enterprise resource planning (ERP) system and a reliable general ledger system facilitated easy data retrieval for the data room as requests came in, as much of the required information was already stored electronically.

In cases where the requested information falls outside of my purview, I needed to do some discreet digging. There were breaks in the workload, so we were not continuously engaged in this process for five months straight. Overall, with proper preparation and data management, it was manageable and not overly burdensome.

Ekenseair: As the CFO and owner of the business, my primary role was to serve as the key point of contact throughout the entire process, working with the staff team and prospective buyers. A significant amount of time was dedicated to gathering both financial and non-financial information and preparing management presentations for potential buyers. We also spent time navigating the due diligence process with the final buyer.

We assembled a small team of key management members, limited to just four individuals who we believed would play significant roles in presenting the company. This team included our Vice President of Operations, Vice President of Sales, Sales Manager, and Controller. We thought these individuals could strengthen our presentations and facilitate the sharing of information requests. This way, not all the workload fell on me, and we could distribute tasks among the team.

During the initial stages, the focus was primarily on gathering financial data, which my Controller and I handled. As we progressed, we were able to extract non-financial data, such as sales figures, parts data, and margins, from our ERP system, streamlining the information-sharing process due to our good data management system.

The process does require a significant amount of time and effort. However, the goal makes it all worthwhile. With Stout’s help, we felt like we hit a home run with our buyer. We also maintained a friendly relationship with the buyer, and we continue to have conversations with them. They have become friends of ours, making the entire experience a great one despite the time investment.