📬 Walking the tightrope: driving performance vs. the need for control

Rosie from Fresno asked:

First off, I LOVE the content! Really appreciate you sharing everything. My question is regarding M&A. We have 5 physical therapy clinics, 4 of which we have acquired via personal funds and conventional bank loans. There are a number of larger acquisitions in our pipeline, but we are getting close to maxed out with the debt we can take on from a bank. Curious as to other options and specific models regarding private lending (willing to sell equity or pay a higher interest rate). Any help would be appreciated.

Congratulations on your successes so far, Rosie. It sounds like you are building something exciting.

First up, you need to remember those bank limits are there for a reason. If your banks are telling you they are at capacity for your business, this should give you pause for thought.

As you bring more debt into the business, you increase risk. The economic waters are still choppy - inflation is stubborn and geopolitical risk is high. So, if you are looking for more debt, make sure you have a good quality financial model, stress tested for downturns

There may be paths to other debt i.e. asset-backed lending (depending on your balance sheet structure), likely at higher interest rates. But before you explore these, you should think about whether you really want more bank debt, and what this would mean.

Introducing an equity partner is one alternative, and is the most ‘balance sheet friendly’ way to continue on your acquisition rampage. But that would mean equity dilution for you, of course. And a new equity partner may want some level of control/veto rights over your operations. So it’s no free lunch.

Another route to explore is through the structure of the acquisitions. If you have been using 100% cash on closing, explore alternative forms of deal consideration.

Here are a few:

• Either a seller note/deferred consideration (although this is just debt in another form, it does tend to be ‘friendly debt’) - you can use future cash flows to pay down the seller note.

• An earn-out structure - whereby you pass some of the post-closing risks to the seller. Sellers will resist this, so may lead to a higher overall price or put your deal at risk.

• A stock exchange or partial stock exchange. Where you acquire the business but rather than acquiring it for cash you exchange for shares in the newly enlarged group. Or part cash, part stock. This gives the seller a share of synergies and future upside.

But you should explore all your options, and get some good advice on what is best for your balance sheet and plans. I’d consider hiring a fractional CFO with deep experience in funding roll-ups to go through your numbers properly.

Best of luck with it, Rosie.

Banker Dave from London, UK asked:

How do you balance a desire to drive performance with a need for control, especially in a heavily regulated environment?

It’s hard to be specific as this is so situation-dependent. There is always a sweet-spot for the red lines of control and compliance. If they are too tight, you will suffocate the business. Too loose and you’ll end up in hot water.

In a highly regulated industry, you could be dealing with a level of controls that take you beyond that sweet-spot. This is when it can start to feel like a dogfight between compliance and the commercial end of the business.

So finding that balance is a key part of the job, especially in financial services.

It goes without saying that there is a minimum standard of regulatory compliance that can’t be compromised. So you need to start with the leanest possible, effective control framework to deliver legal compliance.

That is your non-negotiable minimum.

Then you need to reason up from there. If you are building controls that go beyond those requirements, you need to be clear on why. Control is important, but it also has a cost attached. There are the administrative costs, but also the cost of constraints on growth.

Then, on the other side of the ledger, there is the benefit of that additional control. Are those benefits ‘hard’, i.e. measured in banknotes, or are they soft i.e. ethical, reputational, environmental, etc.?

There will always be a team or a project (often more than one) looking to put new controls in. Rarely are there as many forces working in the opposite direction. So some pressure to challenge compliance requirements is important. 

BUT… if you are stripping out controls in a highly regulated environment, this is heart surgery.

It needs to be done carefully, with a scalpel, not an axe.

Strict rules are important, but I think clear principles are even more important. When the rules don’t provide the answer, the principles will. If you’ve got the right people, they should be able to work with this. A great culture underpinned by strong principles will crush a roomful of robots following a rule book, every time.

Thanks for the question, Dave.

Kofi T. from Accra-Ghana asked:

What do you recommend? Taking over from your boss as the CFO, do you immediately implement your ideas or do you gradually introduce them, taking into consideration you used to work with your colleagues under the resigning CFO?

This is a great question.

Stepping up from your peer group, to become the ‘boss’ is difficult.

I experienced this a few times earlier in my career. And it definitely can feel a little awkward at first.

It might take time for your former peers to adjust to accepting you as a boss. And it will take time for you to feel comfortable giving your former peers instructions.

Don’t worry about this, it is natural.

My one bit of advice would be this: don’t leave it as the ‘elephant in the room.’

Address it with your team… something like: “Hey guys, I know we used to be peers, and now I’m in charge. That might feel a bit weird for us both for a little while. But we’ve got some big things on our plate to tackle, and I hope I can count on your support. If you see this as an issue, it would be good to talk about it now, because we have a lot to do over the coming months.”

You were promoted for a reason. Because you are the right person to lead the finance function. So if you have ideas to introduce, then that’s what you need to do.

Putting your own stamp on the team is important. It will accelerate the process of ‘feeling like the boss,’ and your peers seeing you that way. 

Likewise, you don’t want to overload the team, so you need to manage change at the right pace.

Best of luck, Kofi.

If you would like to submit a question, please fill out this form.

Every week I’ll share a book I loved or found useful. This week is another I used to research the Financial Due Diligence Playbook series. This is about the only book I’m aware of that talks about Adjusted EBITDA in real depth:

PS - if you missed the second week of the FDD series, you can read it here

A few of the biggest stories that every CFO is paying close attention to. This is the section you don’t want to see your name in.

Panera Brands CEO steps down, CFO to fill in as interim chief

Thoughts and prayers go out to Paul Carbone who will be double-hatting as CFO and CEO at Panera Bread over the coming months. I assume this will put the long-mooted IPO on hold for a while longer, too.

Blackstone Buying Stake in Accounting Firm Citrin Cooperman

PE participation in the accounting and advisory industry is a growing trend. This looks to be the first secondary PE deal of a public accounting firm. Feels like there are more of these to come…

Fed officials are worried about the inflation impacts from Trump’s policies, minutes show

The Fed just said what we’re all thinking: there are a lot of uncertainties right now. It’s unclear what the new administration’s tariff and other policies mean for the economy. That makes it tough for the Fed to make monetary policy, and even tougher for CFOs to plan for the future.

ICYMI, some of my favorite finance/business social media posts from this week.

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Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.