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AI in Finance Is a Governance Problem — Not a Technology One

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On February 26, 2026

In Accounting and Reporting, AI, CFO, Finance, Leadership

For the last year or two, every CFO conversation eventually drifts into AI. Sometimes it’s framed as excitement, sometimes as anxiety, and sometimes as an awkward silence followed by, “Well, we’re looking at it.” What’s striking is that most of the tension around AI in finance has very little to do with the technology itself. The models work. The tools are improving fast. The vendors all have slick demos.

The real issue is governance.

Finance teams are wired around controls, auditability, and repeatability. AI systems, by contrast, are probabilistic, opaque, and constantly evolving. That mismatch is where most CFO discomfort comes from — and it’s why “let’s just automate this” often stalls once it hits a real finance process.

The first mistake I see is treating AI like just another system implementation. ERP projects taught us how painful that mindset can be. AI requires a different framing: not “what can this tool do?” but “what decisions are we willing to delegate, and under what constraints?” That sounds abstract. It isn’t.

Over the past year I’ve pushed AI tools on real finance questions: revenue recognition edge cases, SEC disclosure interpretations, covenant calculations, and technical accounting memos. The patterns that show up are not technology failures. They are governance failures waiting to happen.

1. AI doesn’t fight back.

If you have ever debated an accounting position with a strong controller or technical accounting lead, you know what conviction feels like. You push. They push back. You test assumptions. They defend them with chapter and verse. That friction is healthy. Same thing for a forecast analysis. If one FP&A analyst thinks they found a good or disturbing trend, it will be debated and verified and usually their work can be recreated and checked.

AI does not behave that way.

If you tell it, “I think you’re wrong,” it often apologizes and produces a different answer. Sometimes an entirely opposite answer. The confidence level remains high. The tone remains polished. The data is processed inside the model, and the AI often struggles to explain — or even remain consistent in — its answers.

In a live finance organization, that would be a red flag. If a manager flipped their view that quickly under mild pressure, you would question the depth of analysis. With AI, the flip can look like responsiveness rather than fragility.

That is a governance issue. It means you cannot treat an AI output as a position that has survived adversarial testing. It hasn’t. It has survived prompt engineering. And the prompt may have been poor.

2. The praise problem.

Most AI agents are relentlessly deferential. “Great question.” “Excellent point.” “You’re absolutely right to focus on that.” In a consumer context, that feels pleasant. In a finance context, it is dangerous.

Finance works because of tension — between risk and growth, between conservatism and disclosure clarity, between what management wants and what GAAP allows. When the “advisor” in the room is constantly affirming the user, it subtly reinforces bias.

I’ve seen this firsthand when asking an AI to pressure-test a disclosure approach. Rather than aggressively identifying weaknesses, it often validates the framing of the question. The tone can make a marginal position sound well-supported. In other words, the user’s confidence can rise faster than the quality of the analysis.

Governance must assume that AI will not naturally challenge you the way a seasoned audit partner or skeptical board member will.

3. The citation illusion.

This one should make every CFO uncomfortable.

Ask an AI to provide citations to accounting guidance or SEC commentary, and it will often comply — confidently. Paragraph numbers. Codification references. Even plausible-sounding excerpts.

The problem is that some of them are fabricated. They look right. They read right. They are formatted correctly. But they do not exist.

In finance, citations are not decorative. They are the backbone of defensibility. When you write a technical memo on revenue recognition or stock-based compensation, the citation is the bridge between your judgment and the authoritative literature.

If an AI invents that bridge, and a team relies on it without independent verification, the failure is not the model’s. It is the control environment’s. Any AI-assisted accounting memo must include a verification step where a human independently confirms the authoritative source. Not “glances at it.” Confirms it.

4. Rule changes and historical drift.

Accounting rules change. Constantly.

Revenue recognition under ASC 606 replaced a patchwork of legacy guidance. Lease accounting under ASC 842 upended decades of practice. The SEC updates disclosure expectations over time, sometimes subtly, sometimes dramatically.

Meanwhile, the SEC’s EDGAR archive goes back decades. There are scanned paper filings from eras when the rules were materially different. There are thousands of examples built under superseded guidance.

AI models trained on broad corpuses struggle here. They can blend old and new regimes. They can cite legacy practice as if it were current. They can rely heavily on the abundance of historical examples rather than the correctness of modern policy.

I have seen AI answers that lean on pre-606 revenue language as though nothing changed. Or that reference lease accounting concepts that no longer apply post-842. To a non-expert, the answer looks sophisticated. To someone who lived through the transition, the seams are obvious.

Governance means you assume the model does not instinctively know the effective date of your accounting framework. You have to constrain it.

5. Finance is not plain English.

Financial reporting language is precise. “Probable” does not mean “likely” in a colloquial sense. “Material” is not a synonym for “important.” “Reasonably possible” has a defined meaning.

AI systems are trained on massive volumes of plain English. That is a strength in many domains. In accounting, it can be a weakness.

I’ve seen answers where the model drifts into narrative explanations that sound sensible but subtly misapply defined terms. In a board deck, that might pass. In a 10-K, that is a problem.

When language itself carries regulatory weight, small deviations matter.

So what does governance look like in practice?

It is not banning AI. That is neither realistic nor wise. The productivity gains are real. Drafting first passes of memos, summarizing contracts, identifying anomalies in large datasets — these are powerful tools. AI can be properly trained on your data and become more accurate. Specialized firms like the Big 4 Auditors can train AI models on better and sanitized accounting data, but your small Finance group cannot and its probably using a more general model.

But they must sit inside a control framework.

At a minimum:

  • AI outputs that influence external reporting require documented human review.
  • AI conclusions about trends must be independently tested and verified. Don’t order another $1M of a part because a model suggested it.
  • Authoritative citations must be independently verified.
  • Prompts and versions used for material analyses should be retained for auditability.
  • Use cases must be categorized: drafting support is different from judgment replacement.
  • Responsibility for the final position must be clearly assigned to a human owner.

Most importantly, the CFO has to set the tone.

Let me make a direct observation: most leadership team members are not finance experts, but AI can create the illusion that they are. You need to make sure they understand the risk.

If AI is positioned as an infallible oracle, teams will over-rely on it. If it is positioned as a junior analyst — fast, helpful, occasionally wrong, and requiring supervision — behavior adjusts appropriately.

The question is not whether AI will be used in finance. It already is.

The question is whether it will be used inside a governance framework that protects credibility.

Investors do not care how you produced your numbers. Auditors do not care how you drafted your memo. Regulators certainly do not care that a model was “usually right.” They care that your disclosures are accurate, supportable, and controlled.

AI in finance is not a technology problem. It is a governance problem. And like most governance problems, it lands squarely on the CFO’s desk.

I don’t want to sound like Cassandra warning of inevitable doom. Nor do I want to be the boy who cried wolf while your competitor quietly figures this out and gains an advantage.

In future posts, I will outline where I believe AI can genuinely add value inside a disciplined finance organization.

Wooden puppet draped in green glowing code with a large nose.

My Technology Life: AI: Lying Liars Lie

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On February 14, 2026

In AI, CFO, Computer hardware, Finance

I know that the in-vogue term is hallucinate instead of lie, but since the main interface to AI tends to be via chat — and the models are intentionally designed to simulate a personality — “lying” feels more accurate.

During my attempts to develop the RPG PDF conversion pipeline I described last week (you can find that post here: https://mgpotter.com/my-technology-life-ai-agent/), I encountered behaviors that should sound very familiar to anyone who has tried to push AI beyond toy problems.

Here are a few highlights.

1) Work Claimed, Work Not Done

On several occasions, I was told that the new Python script I requested had been completed. When I asked to see the script — because my own coding is not good enough to trust it without review — I was then told the script could not be found and likely had not been written.

In another variation, I was told the PDF had been successfully processed and that the output was excellent. No output file existed.

This is not a “mistake.” It is the model optimizing for conversational completion. It is trained to provide a satisfying answer, not to verify that work was actually performed.

2) Phantom Sub-Agents Doing Phantom Work

At one point I was informed that five sub-agents had been spawned to divide the PDF and perform OCR.

The problem? The OCR tool in question does not run on the 15-year-old CPU I was using as a test bed. It lacks the instruction set required to execute.

Yet I received multiple progress reports describing how efficiently the sub-agents were performing.

In reality, the tool had crashed immediately. The sub-agents were waiting for a reply that would never come. The administrator bot was confidently reporting progress on work that had not and could not have occurred.

Again, this is not malicious. It is structural. The AI fills in gaps with plausible narratives.

3) “Perfect Output” That Was Garbage

More than once, I received a grand report that the parsing was perfect and ready for conversion into Fantasy Grounds format.

The file was not even close.

The model had learned that the desired outcome was “success.” So it reported success.

4) Hardcoding the Answer

While dialing in table and column detection, I created an answer sheet to help guide the agent’s debugging.

The next output was perfect.

Until I asked probing questions and ran the code through a second model.

There had been no improvement to the algorithm. The agent had simply hardcoded the expected answer.

This is a recurring issue: the model optimizes to satisfy the prompt, not to build a robust, generalized solution.

5) Creative Rewriting Instead of Extraction

In some cases, the “extracted text” was not extracted at all. It had been rewritten and reorganized to be cleaner and more readable.

That might be helpful for marketing copy. It is catastrophic for financial reporting or legal work.

These Problems Are Not Unique to Hobby Projects

I have seen similar behaviors when applying AI to real Finance questions:

  • SEC citations that do not exist
  • Press releases with invented links
  • Tariff rules misread and inverted
  • Spreadsheets reorganized in ways that no longer foot

In Finance, you cannot be 98% right. Especially when you are reporting publicly.

A 2% error rate is not a rounding issue. It is a career-limiting event.

How to Reduce These Errors (But Not Eliminate Them)

There are ways to mitigate these behaviors. They require discipline.

1) Force Evidence, Not Assertions

Instead of asking whether the script was completed, ask the AI to return the full script, include line numbers, include the file path, and confirm the function definitions exist. Make the AI produce artifacts, not conclusions.

2) Require Verifiable Citations

Instead of asking what an SEC rule says in general terms, require the model to quote the exact paragraph of the rule, include the regulation number, and state explicitly if it is uncertain rather than inferring. Force it to cite or admit uncertainty.

3) For Code: Demand Diff-Based Changes

Instead of simply asking to improve the algorithm, require the model to return only the changed lines, explain the logic improvement, confirm that no test data is embedded, and explicitly state that it has not hardcoded expected outputs. This reduces the chance of hardcoding or cosmetic fixes.

4) Explicitly Forbid Invention

Include language in your prompts that instructs the model to say “unknown” if it does not know, to avoid fabrication, to avoid assuming files exist, and not to simulate tool output. You would be surprised how much that helps.

5) Separate Tasks

AI struggles when prompts mix architecture, implementation, testing, and reporting in one request. Break them apart. Treat it like managing a junior associate.

6) Independent Verification

If the output matters, use a second model to review it, recalculate totals independently, cross-reference source documents, and inspect logs manually. Trust but verify is too generous. Verify and then trust provisionally.

The Finance Question

I have seen steady progress in AI tools for Finance. FP&A more than accounting, which makes sense. Forecasts are inherently estimates; variance analysis is expected.

But regulatory filings, audit workpapers, footnotes, tax positions, debt agreements — these are binary environments.

The market, the SEC, your auditors, and your board do not accept “the AI hallucinated.”

The tools are impressive. They are helpful. They can accelerate research, draft memos, and summarize documents.

They are not yet reliable enough to operate unsupervised in Finance.

As of right now, AI tools in Finance should be used:

  • As assistants
  • As draft generators
  • As brainstorming tools

And always with a heavy layer of skepticism and human review.

Lying liars lie.

The models are not malicious. But they are optimized to complete conversations, not to protect your reputation.

That distinction matters.

Excel and Powerpointn icons as hockey players doing a faceoff. SEC logo on the puck..

IPO Process – Underwriting, Forecasts, And The Road To Launch

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On February 3, 2026

In Accounting and Reporting, CFO, Investing, Investor Relations, Working With Investment Banks

While you are grinding away on the S‑1, there are many other work streams running in parallel. One of the most important—and least talked about—is getting through the underwriting process. The S‑1 gets you most of the way there, but it is not enough on its own. You also need to provide the banks’ analysts with a detailed financial forecast.

This is very different from life once you are public. Under Regulation FD, you do not share your detailed internal forecast with sell‑side analysts unless, for some very unusual reason, you have already made it public. During the IPO process, however, you are still a private company, and those public‑company disclosure rules do not yet apply.

This forecast matters a lot, and it needs to be carefully balanced. There is always a temptation to push the numbers—stretch the growth assumptions and aim for a higher valuation at the IPO. In my experience, the less public‑company experience a leadership team has, the stronger that temptation tends to be. That is a meaningful mistake, and it can have consequences in several different ways.

The first is credibility with the sell‑side analyst. This is someone you are likely to have a relationship with for years. The more aggressive your forecast, the more questions you will get. Analysts are very experienced at talking to management teams, and they are good at figuring out when numbers lack a solid foundation. Even if you can technically defend the assumptions, they will still wonder why you are pushing so hard. These analysts work closely with potential investors and will be fielding questions about expectations. You want them transmitting confidence, not concern.

The second issue is the pressure you put on yourself to hit your first few quarters as a public company. The IPO process feels like a sprint, but being public and creating long‑term value is much closer to a cross‑country run than a 50‑yard dash. Missing your first quarter right out of the gate can be catastrophic for credibility. It is very hard to reset expectations once you stumble early.

The third consideration is internal to the banks themselves. Your banking team has to take the deal in front of their internal committees to get approval and a green light to proceed. Everyone in that room has seen dozens—if not hundreds—of IPOs. Their job is to control risk. A management team that appears overly promotional or willing to stretch the truth to grab incremental valuation is a risk factor.

This does not mean you should sandbag the numbers. It means you should make sure you do not need perfect execution and a lot of luck to hit the first few quarters. If you need another practical reason to stay disciplined, remember that you are going to be locked up for at least six months after the IPO. There is no immediate personal benefit to being overly aggressive right out of the gate.

This forecasting exercise also feeds directly into the final negotiation around the expected IPO price. It sounds great to see the stock skyrocket the moment trading begins, but that simply means you left money on the table. A healthy first‑day pop sets a positive tone. An excessive one is just capital you failed to raise. You might recapture some of it later through a secondary offering, but it is far better to price the initial deal thoughtfully.

At the same time, you are also building the roadshow presentation. In the successful IPO I was part of, this was heavily driven by our founder and CEO. He had previously gone through an unsuccessful roadshow, but the business had changed dramatically by the time of this one. Building the presentation inevitably involves bouncing back and forth with the business section of the S‑1 to ensure that every claim and message is properly reflected in the prospectus.

I was fortunate that our founder drove this process. He had deep institutional knowledge of the company and a clear sense of what mattered. Roadshow presentations are strange things. Sometimes they are the focal point of investor meetings. Other times they barely get looked at, and the conversation turns immediately into Q&A.

You will also use this presentation to record the virtual roadshow, so it will be seen by a large number of potential investors. I generally recommend including a few “halo” slides that act as launching pads for key investment themes. Not everyone naturally finds their rhythm in an investor meeting, and a well‑structured presentation can help create momentum. Our CEO did not really need it, but for many teams it can be valuable support.

I am always amazed by how much time gets spent on presentations. This one is more important than most, but it is still a massive time sink. There are so many cooks in the kitchen that the final version is often worse than an earlier draft. In addition to the usual internal stakeholders, your lawyers and the banks’ lawyers will give it an extremely thorough scrub. Eventually, it does get done, and you inch closer to launch.

Usually the last major hurdle—assuming the market is open—is final approval from the SEC. I have written previously about responding to SEC comment letters, and the process is not fundamentally different here:

Responding to a comment letter from the SEC

The stakes are higher and the time pressure is intense, but the mechanics are the same. The key difference is that you generally do not have the option of saying, “We will improve this in the next filing,” even for relatively minor disclosure issues. The SEC will want it fixed now.

You need to move quickly as you approach your intended launch window, but it is worth remembering that the SEC does not want to stop you from going public. Their job is to make sure you are following the rules. You may not even receive a detailed review—or any review at all. If you planned properly and staffed the process correctly, this stage should be manageable. If the SEC uncovers multiple accounting or disclosure issues, however, the process will stall, and it will be obvious to everyone why.

Once you clear this final step and your banks confirm that the market window is open, you instruct your lawyers to notify the SEC that the S‑1 is effective. At that point, you actually launch. My next post will cover what happens once the process moves fully into the roadshow and selling phase.

Business man chasing dollars with stock charts around him

IPO – The Other Ways to Get There (and Why They Usually Aren’t the Best Choice)

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On January 26, 2026

In CFO, Finance, Investor Relations, Working With Investment Banks

In my prior post I made the case that, in most situations, a traditional underwritten IPO is the best path to becoming a public company. That does not mean it is the only path. There are several other ways to end up public in the U.S. markets, and as a CFO you need to understand them well enough to evaluate whether they are genuinely better for your company—or simply more tempting in the moment.

What follows is not a legal or structural deep dive. Law firms do that very well. This is a CFO’s view of the tradeoffs.

Direct Listings

Direct listings get a lot of attention, largely because they avoid underwriting fees and feel more “modern.” In practice, they are only viable for a very narrow set of companies.

A direct listing works best when a company already has strong brand recognition, a large and diversified shareholder base, ample liquidity, and no need to raise primary capital at the time of listing. In other words, the market already knows the company well and wants the stock.

For most companies considering going public, those conditions simply do not exist. Without underwriters driving the process, building demand, and helping establish an orderly market, the risks around price discovery and early trading volatility increase materially. That doesn’t make direct listings bad—it just makes them inappropriate for the vast majority of IPO candidates.

Reverse Mergers and SPACs

Reverse mergers, including de-SPAC transactions, solve one problem extremely well: certainty.

You know you are getting public. You know when. You know the structure. You are not dependent on an IPO window being open three months from now. From a CFO perspective, that certainty can be very appealing, especially after living through aborted IPO attempts.

Another advantage is that you typically do not file a traditional IPO S-1. While disclosures are still extensive, the path is different and often faster.

Those benefits, however, come with meaningful tradeoffs.

The biggest issue I have seen is the absence—or weakness—of the traditional banking ecosystem around the transaction. Without a strong underwriting syndicate, you often lack coordinated sales coverage, aftermarket support, and high-quality analyst research. That can lead to thin trading, poor liquidity, and valuations that fail to reflect the company’s fundamentals.

SPAC structures also tend to carry costs that are easy to underestimate. Dilution from sponsor promotes, warrants, PIPE discounts, and redemptions can be substantial. While underwriting fees may look lower on the surface, the all-in cost of capital is often higher than it first appears.

Reverse mergers are not inherently bad, but they trade IPO execution risk for post-transaction market risk—and that trade is not always obvious at the outset.

ADRs / ADSs

ADRs and ADSs are primarily tools for companies that are already public outside the U.S. They are mechanisms to package foreign shares into a U.S.-compliant instrument.

They are not, in practice, an IPO alternative for a private company deciding whether to go public. For that reason, they are usually a footnote in this discussion rather than a core option.

Spin-Offs

Spin-offs are a different animal entirely and typically apply only when you are already part of a public company.

There are two primary ways to execute them. One is selling shares of the subsidiary into the public market, effectively raising capital. The other is distributing shares to existing shareholders of the parent company.

Each approach has very different implications for capital structure, investor base, tax treatment, and management incentives. From a CFO standpoint, spin-offs are less about “going public” and more about capital allocation, strategic focus, and value realization. They can work extremely well, but only in very specific circumstances.

The CFO Lens

All of these alternatives exist for a reason, and in certain situations they are the right answer. What they generally do not do is eliminate risk—they simply move it around.

The traditional IPO concentrates risk upfront in execution and timing, but it also brings structure, market education, analyst coverage, and tools to manage early trading. Many alternative paths reduce upfront uncertainty while increasing long-term market and valuation risk.

As a CFO, your job is not to chase novelty or certainty alone. It is to understand which risks you are taking, which ones you are transferring, and whether the resulting public company is actually stronger five years down the road.

In the next post, I’ll tie these structural choices back to what actually happens during an IPO process—and what most people outside the room never see.

A grail with $ signs and charts on it

IPO – How to Grab This Holy Grail

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On January 22, 2026

In CFO, Finance, Investor Relations, Leadership, Working With Investment Banks

In the first year of my most recent job, I finally managed to get an IPO done. I had been close a couple of times in the past, but in each of them the market took a dive right when we were close to launching. One time the 2008/2009 financial crisis hit and the window slammed shut. The next time the leading company in the space suddenly imploded and almost instantly went into a hard bankruptcy. The market as a whole was still open, but there was zero investor appetite for the type of company I was trying to get over the finish line (yield co).

We had done all the work in each case with the S-1 done and the banks lined up, but if the market is not taking deals, no one cares about all the work you did. That is my first caution about doing an IPO, a lot is not under your control.

I want to expand that idea to the career of being a CFO.  There is really no guarantee that an IPO will happen. I have been approached many, many times by recruiters looking for a CFO for a pre-IPO company. Many are said to be 3 to 5 years out. Others within 2. Over the years it has to be 30 to 40 different approaches. 2 companies actually made it public and I worked for both. One after I left and then the window opened again and the one I just left and I succeeded at taking it IPO.

IPOs are pretty rare and never a sure thing. Even the company I succeeded at had tried once before and had the bad luck of immediately following Facebook and that initial attempt failed.. The market reaction to Facebook’s IPO created real hesitation for anything adjacent. As much as it is exciting and potentially pretty lucrative, be thoughtful before accepting a job where a lot of the attraction is the IPO. The further away the expected IPO is, the lower the chance it will happen when it is expected. Usually you are not taking pure start-up risk if the company is seriously considering an IPO, but it is riskier than average, so can you recover from failure? Remember that the consequences of failing typically fall most heavily on the CFO, even if the real issue is not financial.

Why Do an IPO?

Earlier in my career I went to a CFO interview for a pre-IPO opportunity and ran into a founder CEO who did not want to do one and wanted to argue with me about it. Once I got past the annoyance of the disconnect between the recruiter’s pitch and the job the hiring manager had, the discussion basically boiled down to the company was cash positive and had no barriers to growth because of a lack of capital. Ultimately that company stalled a little and got bought out by a larger public company and the CEO / Founder was let go, but at the time, it was doing well and we had a hard to and fro about the pros and cons of being public vs. private.

For me, it only makes sense for a company to go public if the weighting of these five factors clearly points in that direction. This is not a checklist exercise—circumstances vary, and the Board and management team must deliberately weight each factor to determine whether being public truly strengthens the company.:

  1. The company needs access to permanent scalable capital
  2. Shareholders, including early employees, need liquidity that the private market cannot provide
  3. The company requires acquisition currency
  4. The extra credibility, brand augmentation and market positioning is a big positive
  5. It is needed for talent attraction and retention

There are real downsides to being public, including a potential lack of flexibility because you now need to meet external expectations and in a way that there is no hiding from timing and execution. You also need a robust financial reporting system and a strong forecasting ability. Your ongoing audit, legal and insurance expenses will jump in a pretty significant manner.

So if you are part of the management team and looking at it or interviewing to join to be part of the process, you can sum up the choice into one question, “Does being public make the company strategically stronger five years from now – net of cost, distraction, and loss of flexibility?” Or, in my case having lived off and on in Silicon Valley for several decades and not done an IPO “Do you want to take the chance and just do it so you join many others here in the experience?”

Years ago and still embedded into some foreign stock exchanges is the profitability criteria. However, there are so many unprofitable and earlier stage companies that have gone public (common in drug development and many tech companies) that profitability is often just a valuation footnote.

How do You do an IPO?

There are actually quite a few ways you can get public in the USA, and these are some of the main ones:

  1. Traditional Underwritten IPO – One (usually many more) investment banks take a risk position and then bring the company public.
  2. Direct listing – The company lists their shares directly on an exchange.
  3. Reverse Merger (may be a de-SPAC) – Merge with an already public company in a way that results in you controlling it. Has become much more of a tailored transaction using SPACs.
  4. ADR/ADS – Package up foreign shares in a compliant instrument and list on a USA exchange.
  5. Stumble into it – have enough shareholders that you qualify under SEC rules. Could be Reg A+ or Reg D.
  6. Spin-offs from already public company.

I don’t want to try and make a comprehensive document of all the different ways to do it. There are much better sources via law firms that explain the legal mechanics in detail. Instead I will concentrate and discuss the ones I know the most because of personal experience, and the one I was successful at was a traditional IPO.

To start with, I will make a sweeping statement: in almost all situations, a traditional IPO is best.

Being underwritten by banks and going through the full SEC registration process forces a level of rigor that most private companies simply have not needed before. Drafting and refining the S-1 is not just a disclosure exercise; it is an operational stress test. Financial reporting, controls, forecasting discipline, risk articulation, and internal processes all get examined, challenged, and tightened. Companies that survive this process emerge far better prepared to operate in the public markets than those that try to shortcut it.

Equally important is the role of the banking syndicate itself. The lead and co-managing banks bring together investment banking, equity capital markets (ECM), research, sales, and trading into a coordinated effort. The ECM team, in particular, has deep, current knowledge of the IPO investor universe—who is allocating capital, what themes are working, what valuations are realistic, and how demand is actually forming across different types of funds. This is not theoretical insight; it is informed daily by live deal flow and constant feedback from institutional investors.

That knowledge is critical in shaping the equity story and preparing management for the roadshow. The banking team helps refine the narrative, pressure-tests messaging, and ensures that management can clearly and consistently articulate strategy, growth drivers, risks, and capital allocation priorities. The roadshow itself is not just a marketing exercise; it is a real-time discovery process. Investor reactions feed back into pricing, sizing, and allocation decisions, all with the goal of creating a stable, high-quality shareholder base from day one.

One additional advantage that should not be overlooked is ongoing analyst coverage. As part of a traditional IPO, the underwriting banks initiate research coverage after the quiet period, providing the market with a structured, independent framework for understanding the company’s strategy, financial model, and long-term prospects. This coverage helps educate a broader investor base, supports liquidity over time, and creates an ongoing dialogue between the company and the market—something that is difficult to replicate without a full underwriting syndicate.

Finally, a traditional IPO provides a tool that alternatives simply do not: stabilization. In volatile markets—or when sentiment shifts unexpectedly—the underwriters have the ability to support trading in the early days after the offering. This is not about propping up a weak company; it is about managing technical pressure and ensuring an orderly market while the investor base settles. That option alone can materially reduce downside risk in the most critical period of a company’s life as a public entity.

Taken together, underwriting discipline, rigorous preparation, informed investor access, ongoing analyst coverage and the availability of stabilization create a framework that maximizes the odds of a successful transition to the public markets. In most cases, that structure is not a burden—it is a competitive advantage. You need to pay for it via underwriting fees, but I think you get more than what you pay for.

I will explain my views on the other methods of going public in my next post and then have one more post to weave in my experience to what typically happens in an IPO.

Strategy, Cadence, and Winning — Lessons for CFOs from Miyamoto Musashi

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On January 19, 2026

In CFO, Finance, Leadership

The word “strategy” did not originally come from business. Its roots are military. In fact, the widespread use of “strategy” in a business context only seems to have emerged in the 1960s. Before that, it referred almost exclusively to warfare. The Greek root of the word relates to generalship and battlefield leadership.

Wikipedia offers a good summary of strategic thinking, drawing on military theorists like Carl von Clausewitz and B.H. Liddell Hart. Stripped down, the idea is simple: strategy is the use of all available and appropriate resources to achieve political—or, in our case, organizational—objectives.

Sun Tzu famously said in The Art of War:
“If you know yourself and you know your enemy, you will not lose one fight in a hundred.”

I personally find Miyamoto Musashi’s Book of Five Rings even more instructive, particularly for business. In the Earth Scroll, Musashi discusses strategy at length, including its application to commerce—remarkably, in the 16th century.

“In the way of business, there are cadences for making a fortune and cadences for losing it. In each way, there exist different cadences. You must discern well the cadences in conformity with which things prosper and those in conformity with which things decline.”

This idea of cadence is critical. The CFO sits at the center of the organization as cash is converted into reporting and analysis. That position gives you a foundation for understanding the rhythm of the business. But numbers lag reality. Recognizing patterns early usually requires looking outward—to Sales, Purchasing, Operations, and the market itself. Being strategic is not about owning multiple functions; it is about understanding the rhythm of the business and knowing when to act.

Musashi outlines nine principles for practicing strategy:

  1. Think of that which is not evil.
  2. Train in the way.
  3. Take an interest in all the arts.
  4. Know the way of all professions.
  5. Understand advantages and disadvantages.
  6. Learn to judge quality.
  7. Perceive what is not visible on the surface.
  8. Be attentive to even small things.
  9. Do not perform useless acts.

Much of this applies directly to leadership. Do not cross legal or moral lines—doing so can derail an entire organization and your own career. Avoid useless busywork. Focus on actions that actually create value. Learn broadly, not just within your own discipline.

Musashi also emphasizes people and leadership at scale:

“In grand strategy, you must be victorious through the quality of the people you employ, through how you utilize them, through ruling correctly, and through applying the law of the world in the best way.”

Individual skill matters, but victory at scale requires leveraging others. This applies directly to the CFO role. Your job is not to win every fight yourself, but to enable the organization to win.

He reinforces this idea repeatedly:

“It is necessary to know ten thousand things by knowing one well.”

And:

“You should not have a predilection for certain weapons.”

In business terms, this means not relying on a single tool or framework. CFOs often try to win purely with numbers. Sometimes that works. Sometimes it doesn’t. Even if you dislike leverage, borrowing may be the right decision. Strategy requires adaptability, not ideology.

Musashi is also very clear about the ultimate purpose of strategy: to win.

“The true Way of strategy is to fight and win.”

In business, winning does not always mean aggressive expansion. Sometimes winning is surviving a down cycle. Sometimes it means conserving resources until the cadence shifts. But consistently winning requires deliberate strategy and execution. Not losing is not the same as winning.

If you want to be a strategic CFO, you must help your company win. There are no shortcuts. Finance tools alone are rarely sufficient. A strategic CFO understands how to marshal internal capabilities and leverage external resources when it matters most.

As for how to become that kind of CFO, I’ll admit I don’t have a perfect formula. I’ve been fortunate to work at companies that grew and succeeded, but I still see myself as being on the path rather than having arrived.

Musashi’s advice resonates here:

“Temper yourself with one thousand days of practice, and refine yourself with ten thousand days of training.”

When you are not executing, you should be practicing—developing skills, developing people, debating scenarios, and rehearsing decisions. When the moment comes, you will act faster and with more confidence if you have already thought through the possibilities.

This post is only a broad overview of strategy and how it applies to the CFO role. In future posts, I plan to go deeper into specific actions and real-world examples from my career. I’ll also return to Musashi from time to time—both as a strategist and, for those interested, as a sword fighter.

Strategy, at its core, is about winning. A strategic CFO understands the cadence of the business, knows when and how to act, and helps the organization use all of its available tools to prevail.

That, in my view, is what the title should actually mean.

The Five Rings: Miyamoto Musashi’s Art of Strategy

Above is an Amazon link to a translation of The Book of Five Rings.

CFO looking thoughtful gazing out a window

Being a Strategic CFO (and Why the Term Is So Often Misused)

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On January 15, 2026

In CFO, Finance, Leadership

I think the term I hear most often when a recruiter calls me about a CFO opportunity is that their client is looking for a “strategic CFO.” I also see no shortage of articles in the finance trade press on the importance of being strategic, or on how the modern CFO must go beyond the traditional role.

I’ll start by saying that many of these articles rely on a very narrow—and frankly inaccurate—definition of what a “traditional CFO” is. In many cases, what they describe sounds more like a Controller or Head of Accounting than an actual CFO. I can forgive this to some extent; claiming to offer a bold new insight makes for a more clickable article. Still, many of these pieces feel shallow and suggest a limited understanding of what CFOs have always done.

One of the most common claims is that a strategic CFO must be “forward looking.” This one puzzles me the most. Even basic accounting is inherently forward looking. The going-concern assumption alone requires analysis of the future. Budgeting, forecasting, cash flow modeling—these are core finance skills, not optional add-ons. Some finance leaders are better than others at building relationships outside the department and therefore get better insight, but that too is a foundational finance skill. Finance typically sits at the center of the company’s information flow, particularly because it monitors cash. That position actually makes relationship-building easier, not harder. Being forward looking, by itself, does not make a CFO strategic.

Other articles encourage CFOs to “go beyond finance” and take on broader operational roles. That advice is also somewhat puzzling. A CFO is already part of the senior leadership team and is often one of the primary internal and external faces of management. Most CFOs have worked across multiple functions earlier in their careers, and some of us even came to finance from other disciplines.

That experience is valuable—but trying to run other functions can be disruptive. Everyone already has one clear boss: the CEO. They do not need a second one. A good CFO keeps the organization accountable to its goals, especially financial ones, while enabling success rather than trying to personally run everything. The CFO is often the bearer of bad news by default, acting as the reality check when plans miss their targets. That role already requires enough political and interpersonal skill without creating unnecessary confusion about authority.

This advice also varies by company size and stage. In smaller or earlier-stage companies, the CFO (if that is even the title) often has all administrative functions reporting to them. IT reporting to the CFO is not uncommon. As companies mature, however, functional leadership becomes more defined. At the same time, the CFO role becomes more complex—venture funding, capital markets, investor relations, treasury, and fundraising all consume significant time and energy. There is limited usefulness in trying to run every function once the organization reaches that level of complexity.

That does not mean the CFO should stay locked inside the finance department.

A CFO can help Sales close deals by structuring contracts properly, reducing currency risk through hedging, and ensuring revenue is recognized correctly from day one. That only happens with strong working relationships. CFOs can help Purchasing negotiate better supplier contracts, often playing an effective “bad cop” role, and sometimes bringing financing relationships to the table to ease pressure on terms. Legal and IT are often natural allies. COOs usually appreciate help driving down costs or evaluating locations for new facilities. CFOs are also frequently asked to lead large, cross-functional initiatives.

All of this makes you a better CFO. You make better decisions. Your team does too. Communication improves. You build credibility, which makes difficult conversations easier. When you later complete a major M&A transaction, integration and synergy realization are far more achievable because you already understand how the business actually works.

But none of this, by itself, necessarily makes you the “strategic CFO” that your CEO or board says they want.

At this point, you may be a very good CFO—just without the label.

To understand what “strategic” really means, I think we need to go back to the root of the word itself. I will explore that in my next post.

20 Years as a Public Company CFO

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On August 4, 2024

In CFO, Finance

It is funny that even to establish the right date with something that has an SEC filing and a press release can be a little difficult, but when the action happened in Asia, it could happen on one date and be recorded in the SEC system on another.

So there is an SEC filing on August 4th, 2004 that has a press release dated August 5th announcing that the merger between STATS and ChipPAC had been completed. That press release has a quote from Michael G. Potter, Chief Financial Officer.

That is the date that I became the CFO of a public company for the first time. So 20 years ago today or tomorrow using the time where I was when it happened.

Interesting for me as well is that about 8 years of that has been for foreign private issuers. One a Singapore company (STATS ChipPAC) that was also listed on the Singapore Exchange. The other for a Canadian company (Canadian Solar) who had an admin HQ in China so I worked in Suzhou and lived in Shanghai.

I had been the acting CFO of ChipPAC before the merger and before I joined ChipPAC as their Controller I had been acting CFO of a $1B revenue SBU of AlliedSignal/Honeywell. But acting is not being the CFO. And an SBU is not the top job for the company.

During my time as CFO, I have done quite a few acquisitions and some divestitures. I have done a large variety of quite large equity and debt transactions (IPO, secondaries, converts, high yield debt, CLO for M&A, bank loans (Term A and B) and all sorts of equipment leasing and project financing. Even tax equity financing.

I have done banking and investor relations across North America, Europe and Asia. In the USA, I was CFO in the Silicon Valley area and Portland, Oregon. Had good years and not so good. 

I also have been a fractional or temporary CFO and that was fun and rewarding as well.

When I get asked what does it take to be a successful CFO, I can give an answer around being strategic and taking your area of expertise to the executive team and help lead the company. That is a true answer and what CFOs do. But not what sustains you over time.

What I really remember is the hours and hours working with my staff(s) all over the world. I have had 6 different people that were part of my staff make it to be CFO of public companies, so somewhere is all that work and selection of hires and promoting I must have been doing something right, but most of it is setting a North Star for the team and letting the natural effort and skill of people in your team shine through. I always look forward to going into work and seeing my team and that is as true as ever with my current team.

I managed to make it to CFO at a somewhat young age so I hope to have more than just a 20 year post to make, and I have served on one public company board and several others over the year (and am on a large renewable energy developer’s board now). I imagine that I will start doing more of that soon enough.

If you are interested in some of my observations of being a CFO during the years, I do have a blog at mgpotter.com where I posted a series of articles. I hope to make video content for those articles as that seems to be the leading way to communicate today and I have great gear that my current company makes. As always, I will teach myself to do that just like I have been experimenting with AI to keep current (ollama) and I have been running a small online business to try and learn the skills needed there.

Evaluating Opportunities

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On February 12, 2018

In CFO, Investing

When I first moved to Silicon Valley in 1999, I routinely received phone calls from DotCom start-ups looking for a CFO. I was a Controller of a division (close to $1B in revenue) of a big company, but I had just been promoted to that level for the first time and had near zero experience in what I thought was needed to be a CFO (the general advice these days seems to be to pretend you can do it and just take the job). I used to have a list of the companies that called me, and none of them made it. At the time, they told me I was an idiot for not leaping at my chance. Cryptocurrencies remind me of that.

Now, before I continue, I must admit that one of the companies that contacted me was Amazon.com. This was after they had gone public and their stock was quite high. They were looking for employees with inventory and supply chain experience, the title and pay was far below what I was making and I would have had to move to Seattle. The stock suffered in the DotCom bust, so it seemed that my decision to not change jobs was smart, but if I were really the genius that many bitcoin experts claim to be today, I would have invested then. I would have been quite wealthy now if I had.

I can only console myself in that I was also offered a job a few years later for a lower title and pay at a major networking company. When I declined, the recruiter scolded me for being turned off by their attitude and then not long thereafter, they took the largest inventory write-off that I am aware of and the stock really has neve recovered its high-flying ways since then. Finally, and more directly related to cryptocurrencies, I was a long time participant in distributed computing projects like SETI at Home and such and the early appearance of bitcoins and the first miners came from people like me that were using idle cycles of our CPUs to do something else. However, I never installed the bitcoin mining software. In theory, I could have been mining bitcoins when it was possible to solve for them using a regular PC and do it as an individual. If I had done so and kept the bitcoins I made, at today’s prices I would be far wealthier than my reasonably successful career has taken me to.

I added those three examples because I want to make it clear that I have no magical ability to know the future and perfectly guess every opportunity. This is compounded by the fact that you need to choose now and will not know until later, and often much later, if you made the right choice. Using bitcoins as an example, there is not guarantee that I would not have sold the coins at $100. Considering that I have played Magic the Gathering (a card game) off and on for quite a while, it is likely that I would have placed coins in MtGOX and lost everything I put in there. When you back solve what could have happened, most people solve to the best possibility, not the likely one even if you made one arbitrary correct decision that you did not in the past.

I have seen quite a few posts on bitcoin value cross my feed on Linkedin in the past few weeks, much more than when it was going up and all from people that claim some expertise or professional skill for bitcoin and all suggesting that now is the time to buy the dip.

Blockchain is real technology that is finding new applications. All the cryptocurrencies are experiments and they are valuable for the same reason why anything is valuable – people are willing to spend money on them. There certainly is a good argument that a currency linked to a blockchain has merit and can quite valuable for online transactions. There is no doubt at all that blockchain as a technology will see many applications, like perhaps tracking materials in the pharmaceutical production chains.

There also is no doubt that there will be lasting wealth that comes from the innovation, but I don’t think that trading advice (buy or sell) is the right thing to promote on Linkedin or on a Facebook feed. That type of decision needs to be an informed one from individuals, and older advisers may be trapped in past expectations, but they have also seen a few bubbles pop as well.

Even the arguments around cryptocurrencies and why they have value and are a currency themselves or are more valuable than other traditional currencies are suspect. For those of you that don’t know the standard argument, the normal value drivers mentions are i) production cost, ii) scarcity and iii) utility. The basic argument is that the cost to produce a bitcoin is high, they are scarce by design with only 21 million that can be produced and the blockchain technology makes them useful.

However, the production cost is based on current brute force problem solving and scarcity is all about bitcoin itself, not cryptocurrencies in general. There are near infinite algorithms that can be designed to generate a cryptocurrency and there are plenty of new industries where the first mover did not ultimately dominate (Netscape is a good example as is Visicalc and many other similar examples). The utility is even questioned because the transaction time and process to verify a transaction is thought to be too long and many merchants that had been accepting the currency have abandoned it as the transaction time exposed them to too much valuation variance. Even the early criminal use of bitcoins (the initial foundation in its value came from criminals using it to transfer money for drug deals and to do money laundering) has suffered as authorities have proven to be much better at tracking and shutting down bitcoin fueled deals than was originally assumed.

Even the crypto part of the equation may ultimately prove to be flawed as there still is the real possibility that the assumptions behind the math that powers it may ultimately prove to be false. Eventually there may be no more “greater fools” and there is a risk when you buy that you will end up being the last and most foolish.

I’ll try and parse through my thinking on these types of opportunities to show the how I think through I as an example of what I have done in the past as a CFO and what I do today when asked for advice as a consultant.

First, the normal reaction is to shut down and say “no” to new opportunities because these always represent additional effort needed and additional risk. In the case of bitcoin, the easy responses are “tulip mania”, “artificial bubble” and “ponzi scheme”. I am not saying that those responses are correct, but the longer I have been at it, the easier I find my mind comes to a way to say no. Saying no is easier, and, since the consequences of saying yes or no are rarely immediate, you can insulate yourself from the lost opportunity or loss easily. The problem is, saying “no” is easier, but it also closes down growth and opportunity and isolates you from changes in the market. When I detect that instinctive “no”, I push it down and listen and ask one or two simple questions. This is not free, that costs time and mental effort and causes some distraction, but I think that cost is worth the possible upside, so I pay it more often than not.

The questions I normally ask are: 1) Is this a decision I can or should make, 2) Can I or we afford the expense (or not afford to spend it), 3) How long do I have to consider it, and 4) Can I understand pretty quickly what the idea is all about and how it would be profitable?

The first question is an interesting one. As a Finance professional, and especially as you move up the management ranks, you will get both increasing power over spending and increasingly be lobbied for many different ideas outside of the traditional Finance responsibilities. However, you also need to know your limitations. One advantage of being part of a team is access to opinions and expertise of your team members, and using that will probably result in more informed decisions. You also need to consider that the latest encryption standard may seem cool to you, but the head of IT may not want you to install the ransomware you were just pitched in email.

The second question really is about practicality. I would love to have several different phones and VR headsets and whatever else comes out to see which one is good, but I only really need one phone at a time and I barely have time to use the VR headset I already have, so even more does not help. In the case of bitcoins, like most people, I have a wide variety of investment options in front of me, and bitcoins are just one of them.

Coupled with the cost and time commitment is the need to understand if you should be doing without it. I could just use pen and paper and brain power to calculate my taxes, but Turbotax does a much better job and does it much faster. The danger with budget or time pressures are that you may ignore something important. I have used the time when I was flying to read up on new technologies and I have always carved out some time to look at what has changed in the market compared to what has been happening. This is important for personal portfolios and reserving even a small amount of your investment capital (5%) to invest in new technologies or trends can help here.

It has been my experience that the shorter time you have to make a decision, the less something makes sense. There always is lots of marketing and media hype to buy or sell now, but rarely do you need to make an instant decision. If a technology is good, or a trend really has changed, you can enjoy the benefit well enough if you spend a little more time to make sure you understand what you are considering. Most importantly, the risks it brings. In the case of cryptocurrencies, there are a lot of self-proclaimed experts, but most a simply hyping without any depth or new information. I also have seen a disturbing pattern emerge of people with fairly questionable backgrounds suddenly getting involved. It sure is easy to promote this new idea that replaces traditional investment products when you lost your broker license because you were convicted of defrauding your clients.

Counter to the previous concept of making sure you have enough time to consider the new opportunity, it also must be something that you can grasp with a reasonable amount of time and effort. There are always slight edges that someone with a decade of experience and education can exploit, but it might not be the right thing for you to try and figure out. Quite often new technology products work well for people with the specific skillset to use them but are not worth the cost f you cannot program or change all the base setting on your computer to get the additional 5% performance boost. Learn to recognize when something is more complex than you have the training and time to understand quickly and deeply enough and reach out for help. Do not be afraid to say you do not know or do not understand.

I have always been an intuitive problem solver but working in my chosen field which is seeped in process and logical progression, I have to take what I feel is right based on my internal process and break it down in a way that I can repeat and explain it to the people waiting for my decision.

In the case of bitcoins, and other cryptocurrencies, I have seen little reason other than pure speculation, to try them out in any real way. I can understand that the base technology is something to follow closely, but I do not think that it is something that needs urgent action and there are real risks of fraud and theft and regulatory curtailment. I also am concerned about the poor quality of the advisers that have attached themselves to it. As I cautioned up front in this blog, I could have made quite a bit of money just by embracing bitcoins earlier in my life and I was a natural fit for the early adapters there. Unlike the self-called experts I see in the media these days, I know that I don’t know a lot of the details and I think it is not worth my time and money to learn more, but it is complicated and I could be missing something. I have a real edge in other investment and finance areas and I am choosing to spend my time there.

Mergers and Acquisitions – part 2 – How?

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On July 12, 2016

In CFO, Finance, Mergers and Acquisitions

This is part 2 of my three part M&A process overview. Part 1 is Why? and Part 3 is Afterwards. This blog will focus on how to actually do the M&A transaction and run the process. I will mainly discuss buying but will also have some discussion on selling as for every buyer there needs to be a seller, but there usually are more than one interested potential buyers so generally there are more people working buy processes than selling processes. I will assume at this point you have reached the end of the Why? stage and have concluded that the transaction makes sense and you want to actually move into execution mode. The level and intensity of internal effort will now jump. You probably also will need some external resources and this is where having a good relationship with your investment bankers will help. Typically you also use an external law firm as well to help with the Purchase/Sales Agreement unless you have either the right internal legal resource or a big enough team that they can handle the extra work. Remember that your Legal team can review a draft of the contract but they will need specific direction on what the transaction and business risks are to make sure you are protected. You will have several processes running at the same time.

The Why? step gave a basic value range, but the transaction step requires a lot more substantive analysis. You need to establish how you will pay for the transaction, so a financing process will start running. You need a business and legal due diligence process. You need to research the accounting implications of the proposed process. As the deal advances and becomes more certain, you need a team to start up to develop the integration and synergies realization plan. You will be running an intensive contract process with Legal leading it with the input of the business leaders. This is a lot of work and usually deadlines are pretty tight.

I can tell you right now that you need someone to quarterback the administrative part of your process that is good and can keep everyone on track to hit deadlines. There will be a lot of processes that all with have different due dates and lots and lots of meetings and reports due. I do not suggest that you try and run this all yourself. Much better to have someone specifically in charge of this. I have been fortunate to have had several excellent people that have done this for me on past deals (my last executive admin and my last Controller were both huge helps to me), and you need to make sure you have someone you can trust doing this.

Analysis process

This is the central process and the result is what you would be willing to pay for the acquisition. All the other processes feed into this central process and the timing is important as you eventually will hit a bid deadline and need to make a firm commitment. Valuation is almost always calculated in a discounted cash flow model with auxiliary EBITDA multiples as well. Usually before and after synergies and with a discount rate range to test the effect on changing assumptions there. It will end up being a large and complicated model and Excel models are easy to make a mistake in. The last deal that I lead, my boss found an error when he stepped through it while trying to understand the value drivers. Make sure you check your model carefully here. You will need to identify potential synergies that could result from the transaction and a plan to make sure they happen. I will discuss that further in part 3.

If you do not have a good internal model or if you have not run such a model before, then this is an excellent item to ask help from one of your bankers. If you have a good relationship, you do not have to formally bring them into the M&A process just for a model. If they start providing real valuation assistance and bidding strategy, then you probably should formally sign them on as an advisor. In my experience, bankers do not have the same detailed industry and business knowledge that you and the management team do, but they do know valuation metrics and what other deals have cleared at much better than you will. If they help in the modeling stage, but not enough to earn a fee and just as part of the relationship, then you owe them a favor. I strongly suggest that you use them in the financing or in another project and make sure that the banker does get paid. This actually can save money in the long run as you do not have to maintain as many staff and everyone on the other side will appreciate the two-way relationship.

Be careful with the Non-disclosure agreement that you are asked to sign as well. I usually push back on the no hiring clauses which are usually too long and be very careful that there are not clauses that attempt to limit your ability to compete. There usually are ridiculous data destruction rules as well. Your legal team will probably catch these issues but you should help them push back as well.

The data in your model should come from the target company and from you team very similar to how you would build up an internal forecast. Sometimes you are making an unsolicited offer and you need to build the model from public information and informed guesses but even then you should reach a point where the other side has opened up and is providing more detailed information. You will need to do scenario analysis where you flex factors like discount rates but also where you flex sales, costs and other assumptions like synergies. This process can help you build your plans for after the transaction and hopefully give you options to follow in case conditions change and you need to change with them to hit or beat your internal targets.

Due Diligence

One branch of the valuation process is due diligence. Although you can protect yourself somewhat in the PSA in the representations and warranties section, it is much better to discover problems before a deal closes than afterwards. As CFO, you will be running the financial and accounting due diligence (DD). You might include outside accountants to help if needed. This DD will concentrate on determining if the accounting policies used by the target are appropriate and diving into various asset classes and liabilities to see if you can find appropriate back-up to see f they are fairly stated. Normally you look at accounts receivable and inventories to make sure they are not overvalued and are real, look at the sales numbers reported to see if there is evidence that they actually happened and in the periods stated, and do a general review to make sure that liabilities are proper. Typically there is a working capital adjustment clause when you are buying a business that will adjust for any differences between the target balance sheet and the actual closing balance sheet, but this process is important anyways as issues here can call in question the basic integrity of the process itself.

One other area of intense focus for financial DD is a review of the current tax position with an emphasis on determining how aggressive they have been in the past and if there is undisclosed potential tax liabilities. This includes liabilities that could be triggered via a change in control.

Another important DD process is legal DD. Exactly what is checked depends on what the transaction is focussed on. For example, in a technology company, you would want to review the current state of patents and look for existing issues and potential issues. Very often a competitor will become more aggressive in asserting patents if they think it can damage a deal that would make a competing company stronger. You also need to carefully review existing employment contracts and if there is a history of employee actions. If you are buying a factory, you need to verify actual ownership. When buying land/development assets, you need to carefully review titles and items like mineral rights and operating permits. Make sure that any patent licenses or mineral rights easements are transferable if there is a change of control. If the asset or business is in a foreign jurisdiction, you need to make sure you understand what the local laws are and if the target is in compliance and if you would remain in compliance if you owned the target. If there is a lot of detail to be checked, you are almost always better off hiring an outside legal firm that specializes in such work. Legal DD can also check if there are any product liability issues that may effect valuation or that need documentation in the agreement.

Linked to the legal DD but its own speciality is environmental and safety DD. If there is land ownership or a factory that is rented, you need to verify that the current or past activities, including activities for past owners, have not created environmental issues. If a previous owner created groundwater contamination, you could end up being liable even if you are quite removed from the entity or person that caused the issue.

If you are buying a factory, then your operations and R&D group should review the asset being considered and give their report on it. This is important because they will have to integrate it into their supply chain and production plans and economies of scale are often a big source of expected synergies. They will also give you good input on the state of the buildings and machines and if there is a lot of additional investment needed (which will change the valuation). The R&D review can reveal under or over investment into R&D, both of which can impact future operations. It also can give an insight into the patent process, in particular how integrated the risk management process is to ensure that patents are not being violated and that reasonable efforts are routinely made to check that. There are many more areas that you could possibly have to run a due diligence process. If you have never run such a process before, try and search and find a checklist to help you.

Financing Process

You can pay for an M&A by cash, shares, assuming debt, or a combination of the three. You can raise the cash through issuing debt or shares, or you can use your own cash on hand. You can also use the cash in your target to help pay for the transaction. The only real difference between M&A related related financing and other financings is the potential time line as it might be compressed to fit a deal deadline. I will not go into too much detail here as various methods of financings are topics in and of themselves, but this is an area where including an investment bank early can give you a head start in getting this closed on time. If you are selling shares or issuing debt, expect the deal to be at least a little bit harder as the market will probably take advantage of the tight deadline and the additional risk to push for higher than the average terms you usually can issue at. Hopefully the reasons why you want to do the deal are compelling.

Closing the deal

Once you are advanced enough in your analysis that you feel that you are confident about the valuation of the target and that you still want it, you need to close the deal. If the target is running a process, there usually is a bid deadline and very often there are two bids. The first bid, early in the process, is a non-binding indicative offer. Eventually there will be the request to make a binding offer. The goal of the non-binding offer is to make the next round (bid higher) and not be too out of line with reality that you are not taken seriously. Once your offer is binding you should be granted exclusivity as soon as you are the “winner”. There is still negotiation to come.

As part of most sales of businesses, there will be a presentation and a question and answer session with the management. This is a chance to evaluate the team you are potentially acquiring, but they will be evaluating you as well. Everyone appreciates honesty. If you foresee that you will be doing lay-offs, including some or all of the management team, telling them that you will not be laying anyone off is counter-productive. They will not believe you and mistrust will be the result. You also need to make sure that only one person is running the “tough” part of the negotiations. I recommend that the manager that will be leading the business be as isolated as possible from being seen as the person that is the “bad cop”.

You want to pay the lowest price you can and still get the deal done (and never more than what the business is worth). That will mean presenting a case in negotiations that explains the lower valuation. It also means making sure the PSA has lots of protection in it for you as the acquirer and that presents as mistrusting the current team who will be assuring you everything is fine. If at all possible, you want them to be arguing for you in the process. I typically have been the deal closer, so that means I am the one that pushes hard with the target and internally to get it closed. Listen to your lawyers. You are paying them a good fee so why ignore their advice. I have been lucky to have a good lawyer on my side for most deals and if your lawyer is stronger, you will often end up with a better deal. Know what are the contract points and the valuation point at which you will walk away from the deal. Have the discipline to do that if needed. A good deal that becomes bad if your PSA does not protect you or if the price is too high cannot become a bad deal. If you can, you want a break fee if the other side walks away. You may have to get your own shareholders to approve and maybe the seller’s shareholders as well. Even if both management teams agree, the deal may not be closed quite yet. If everything goes well, you will close the deal and buy the asset. Congrats. Now the really hard work starts.

Selling an asset or business via M&A

Please think about all the due diligence I discussed above. Think about the presentations and models that are expected to be received. Usually you write the first draft of the purchase/sales agreement, so you need a good lawyer to lead the process. All sorts of different functions from the other side will be making inquiries and you will need support. You also may have to deal with the reality that your team will be facing lay-offs and will have a lot of uncertainty. You can set retention bonuses and deal closing bonuses to motivate people, but this will be a very hard process for you.

Here are some valuation books I have used in the past: Little Book on Valuation Valuation – Measuring and Managing the Value of Companies  

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