Strategic CFO: Debating Alternatives to Optimize Business for Long-Term Value
Updated: Oct 20
As a strategic CFO, I recently worked with an entrepreneur Frank who struggled with optimizing his plateaued business for a long-term sustainable value. Through a series of analytical discussions, we put together a plan that built on the existing business while creating a shot on goal for a VC-backed startup and a multi-million-dollar exit for himself.
Frank and I had coffee one day. He shared that he had started a service to local doctor and dentist offices about eight years ago. The business was steady and profitable. The growth was nominal. He worked in the business about 10-12 hours a day and was uncomfortable letting go of his commitment to the business. He also questioned how long he could endure the grind because his business was his full-time job at the current setup with no prospects for a compelling exit or comfortable retirement.
We met several more times after that coffee discussion. As we continued speaking, I asked questions about his business and leadership. He had six service offerings and about 20 employees. His focus was operations. He had insightful ideas about the future but could not figure out how to optimize the business to position it for long-term success without him being in the middle of it.
Review of Existing Portfolio
We discussed whether a six-product offering was the way to move forward. He insisted that his customers sought all six services and that he might lose clients if he did not offer them all. We reviewed the numbers. It became clear however that two of his products were the main drivers for the business, even though the offerings lacked differentiation. He held on to them because he “owned” that territory and experienced no competitive threat in his geography. He sensed he would never be able to scale those services.
There was one service that appeared very promising and, through some software automation, could drive growth over the long term. This service required testing, optimization, investment in development, and proper marketing.
The remaining three solutions could be described as opportunistic. They were not repeat businesses; they would periodically bring in some revenue and were clearly “favors” for local physicians when they needed those solutions.
After several discussions, a recommendation started to emerge in my head. I outlined it, and we spent a few weeks kicking an iterative strategic plan around. Of course, this strategic plan is not within your normal CFO's Scope of Responsibilities. It is, however, a part of Strategic CFO work.
Step 1: Milk the cash cows. We discussed hiring an operations manager trained in the two lead services. We described an optimal manager who would step into this role and truly “own” it. Frank would continue doing the job, but the intent would be to train the new hire to take over Frank’s responsibilities. Frank needed a mind shift that he was no longer to do the job but rather to train another person to take over. Arguably this was one of the most challenging elements of the project.
Frank and I also discussed that the effort would take months to implement: Recruiting and training the right person would take time. We also thought through various short and long-term incentive mechanisms to transfer the proverbial “ownership” of the operations to the new lead.
Step 2: We discussed “shedding” non-core offerings. While not ideal, the solution we settled on involved finding and hiring a few local contractors who would take on these periodic projects. The hardest part for Frank was to give up that revenue and the profit margin. However, giving the economics of the projects to someone else was crucial so they could service the clients.
We also discussed how his streamlined operation should significantly reduce the workforce to sustain a nimble revenue structure. We brainstormed how his employees could be transferred into the new business Frank would be launching.
Step 3: The new startup. We strategized ways to carve out a software-enabled solution into a separate business. (HealthAI investor chat: Is artificial intelligence in healthcare a new permanent feature or fad?) We discussed tactical elements, such as creating a new entity and transitioning a select few paying customers to the new contracts. However, a chunk of our discussions involved exploring ways to scale this offering across other zip codes and take it state-wide and nationally. We formulated a plan to raise external capital via multiple funding rounds for the business to accelerate growth. Frank would become the CEO of that new company and put his energy behind it. We also outlined liquidity events, including Venture to Private Equity Exit.
Looking back at the exercise, I would like to highlight several observations. First, Frank benefited from a new perspective on his business enterprise. He was too deep in; his insight came from stepping out of the business and the fresh ideas I could sprinkle into our discussions. Second, Frank was unusually open to change. He took in new ideas and was willing to experiment with new things. In my experience, this was rare and was one of the key factors behind his success. Lastly, Frank was quick to execute because he had only a handful of stakeholders. For example, he responsibly approached his employees and offered them to transition to the new entity. Had Frank had a Board to report to or a lender to seek consent from, our strategic alternatives exercise could have become an analytical exercise on paper without a chance for a test drive.
Frank and I stay in touch. I encouraged him to seek strategic advisers who can bring a high-level perspective into his thinking about the business. We discussed how he could network with other CEOs and CFOs to gain that perspective. (Company’s Hidden Costs of Employing Full-Time CFOs are high, but one can always network without employing the talent and benefit from having an Operating CFO as a Founder’s “Another Adult in the Room”.) I advised him to put together a Board of Directors. There is some benefit in building the Board proactively before the Board is imposed on the CEO by investors or lenders. This is a bit ironic because the absence of the Board – one would argue – enabled him to make quick decisions and take action. I look forward to watching Frank take his business to the next level.
I changed the names, the nature of the business, and select contextual parameters for this case study, but the lessons may be relevant for other founders. This reinforces the case for Why Fractional CFOs Popular In Biotech and MedTech?