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Biweekly Newsletter – Executive Compensation Decisions

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When a board of directors is determining the compensation for a company’s CEO and other top level executives, there are many factors that must be examined before enacting a specific compensation plan.

Below are multiple articles related to executive compensation decisions:

-One important thing to consider when evaluating any investment opportunity is executive compensation. An executive who is not compensated properly may not have the correct incentive to preform with the best interests of the shareholders. Justin Kuepper explains how to evaluate executive compensation in his article, titled “Evaluating Executive Compensation.”

-In Carmen Nobel’s article, titled “Who Really Determines CEO Salary Packages?” Nobel touches on why, although every CEO and company are very different, executive compensation packets generally look very similar. Two reasons for this are that many directors belong to boards at multiple firms and the second is compensation consultation commonality.

-Some people feel that CEOs are actually being compensated far too highly, including Steven Clifford in his article, titled “How Companies Actually Decide What to Pay CEOs.” In this article, Clifford argues that a luxury tax on any company that pays an executive over six million would be a solution to the over payment of executives.

By Peyton Wille, CFO Consulting Partners

Biweekly Newsletter- Importance of Cash Flow Management

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For any company that is new or in the process of growing in size, cash management is a very important aspect of the business. Cash management is classified by Inc.com, as a broad term that refers to the collection, concentration, and disbursement of cash.

Below are multiple articles related to the importance of cash management:

-For middle-market businesses, cash flow can be even more important than sales and profits, since if the company’s cash flow suffers, the sales and profits won’t matter and the business could fall into failure or bankruptcy. Cadence Bank explains seven ways to prevent this in their article, titled “7 Ways to Strengthen Cash Flow in a Middle-Market Company.”

-Richard Passov wrote an article for the Harvard Business Journal about cash flow titled, “How Much Cash Does Your Company Need?” His article provides a model for how companies should go about determining their optimal capital structure.

-In a great article by Rebecca Macdonald and Nathan Zhu, titled “The Importance of Cash Flow Management,” Macdonald and Zhu ask an important question to business owners, “How well do you know when and where your cash is coming from or going to?” One of the most interesting facts from this article was that only slightly over 50% of small businesses even have positive cash flows.

By Peyton Wille, CFO Consulting Partners

CFO Consulting Partners is a Proud Sponsor of ACG Philadelphia’s Breakfast Meeting

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CFO Consulting Partners is a proud sponsor of ACG Philadelphia’s Breakfast Meeting. The subject for the Breakfast Meeting will be Economic Outlook: Managing & Deploying Capital in Volatile Markets. 

James Carville uttered the famous warning to Bill Clinton: “It’s the economy, stupid!” But is it the economy or political machinations that are driving capital flows, Fed policy (including rate hikes and balance sheet reductions), equity market volatility and confidence, both consumer and business? 

It’s important, as investors and acquirers, to separate the temporary impacts of political gamesmanship from the underlying real economic trends, as those will largely determine the future direction of the economy. And when it comes to successful investment opportunities, its the future economy that matters.

So, are we headed into a recession or will growth stay solid and interest rates rise?

Join us as we welcome one of our most engaging and highly-rated economists, Joel Naroff, to discuss these issues and others that will impact the flow of capital and investment in the coming year.

When: March 227:15 AM Registration: 8-9 AM Program: 9-10 AM Space Available for Continued Networking

Location: Union League
Meade & Grant Rooms
140 South Broad | Philadelphia, PA

Pricing: $45.00 ACG Members
$125.00 Non-Members

To register please click here.

For questions, please contact mdagit@acg.org or David DeMuth of CFO Consulting Partners at ddemuth@cfoconsultingpartners.com. 

Biweekly Newsletter-Whether or Not a Full Time CFO is Necessary

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For many companies, the question about whether or not a full time CFO is necessary is often a question that is overlooked and small companies will rush into hiring an expensive CFO rather than outsourcing the work.

Below are multiple articles related to whether a full time CFO is necessary:

-In Patrick Curtis’s article, titled “Hiring or Outsourcing the CFO: What Makes Most Sense for My Business?, he stresses the importance of the decision to hire or outsource the CFO position. The article explains many of the benefits that come with the utilization of an outsourced CFO.

-For many growing companies, the financial resources are not always readily available to take on a CFO, but a small business owner should not worry about this situation. Peter Daisyme explains three alternatives to a full time CFO in his article, titled “Can’t Afford a Full-Time CFO? Here Are 3 Options to Try.”

-If a business owner reaches the conclusion that they do not need a full time CFO, there is still another decision to be made; whether the business should fill the void with an interim CFO or a Part-time CFO. In Paro’s article, titled “When You Need an Interim CFO vs. a Part-time CFO,” he explains the implications of either decision.

By Peyton Wille, CFO Consulting Partners

Newsletter – December 2018

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Behavioral Health: Industry Consolidation and Innovation Is on the Way

John DeLorenzo, Director, CFO Consulting Partners LLC

According to the National Alliance on Mental Illness, 43.8 million people in the U.S., or approximately one in five, suffer from mental illness. Approximately 60% of those affected are not treated, in some part due to a shortage of mental health providers as well as a shortage of available insurance coverage. The result is a significant increase in the use of emergency services for behavioral health issues. The National Council for Behavioral Health reported during a recent three-year period there was a 42% increase in the use of emergency services for behavioral health. By the time a patient reaches emergency services for their condition, it is likely that the condition is much more severe than if they had received treatment earlier. That said, the availability of coverage for behavioral health issues is improving due to a law enacted in 2010, the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA), which made insurers offer no fewer benefits to an individual for mental health treatment than for physical health treatment. In 2014, the Obama Administration widened the scope of coverage through the Affordable Care Act (ACA), by making mental health coverage a requirement for insurers.
As a result of improved insurance coverage, the number of individuals with behavioral health coverage is increasing at a faster pace than there are services available to treat them. Furthermore, the need for behavioral health services is increasing significantly due to the opioid crisis and other drug and alcohol addictions, in addition to the increased prevalence of learning disorders appearing in children such as ADHD and autism. According to the National Alliance on Mental Illness, in 2014, $221 billion was spent on mental illness compared to $135 billion in 2005 according to Health Affairs. Expenditures are expected to rise to $281 billion in 2020 according to The Substance Abuse and Mental Health Services Administration (SAMHSA).

Based on the increases in those seeking behavioral health services, the industry is ripe with opportunities for consolidation, aggregation, and innovation.

Due to the shortage of behavioral health providers, the sector is going to need to rely on technological innovations such as aggregation of data to identify and head off behavioral health issues before they become more complex behavioral issues or result in comorbidities. For example, patients with diabetes have a higher rate of depression and therefore those diabetic patients should be identified and observed for potential depression. The ability to aggregate data to identify patients with possible behavioral health issues early on will hopefully lead to treatment before the illness becomes a more complex problem. Another significant technology opportunity includes digital therapeutics, where software is utilized to provide cost-effective treatment, thus reducing reliance on costly live providers and side-effect prone drugs. Other areas of digital therapeutics are games and other digital tools; aiding children with ADHD or individuals with less severe behavioral health concerns including insomnia, anxiety, and stress. Employers have expressed interest in treatments to reduce stress amongst employees and appear ready to pay for that service.

Another area of investment in the behavioral health space is utilizing technology to scale. The most significant barrier to mental health treatment is access to trained providers. There is a mismatch between supply and demand in rural areas. There are opportunities to develop telemedicine applications so that clinicians who specialize in specific behavioral health issues can connect with a broader population of patients; helping solve the low supply problems. This can be deployed live or in a prerecorded video format to rural areas or places like prisons.

Additionally, significant investments are being made in computerized tracking or in other words, automated workflows. The technology is centered around utilizing algorithms to determine when real-time intervention is required, alerting technicians to implement critical treatment in a timely manner or in anticipation of a negative behavioral health event.

The ability of the healthcare industry to serve the growing demand for behavioral health services in a cost-effective and efficient manner will require new ways to address the distribution of care. Primarily, we expect to see an increased aggregation of providers, deeper integration of services both within behavioral and general health, as well as a significant technological investment to optimize the deployment of service.

All of this provides significant investment opportunity with the potential for healthy returns for private equity investors interested in the healthcare space.

CFO Consulting Partners’ healthcare practice is here to help you, as we are focused on provider practices and technology, particularly in behavioral health. We can assist private equity to prepare a practice consolidation or technology acquisition/investment strategy. We are also available to help technology companies in healthcare with their growth strategies and fundraising.

Update on CFO Consulting Partners’ SEC & Pre-Audit Services

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CFO Consulting Partners’ SEC and pre-audit services help public and private companies produce workpapers and a full set of GAAP financial statements, including notes, for review by its independent auditors. Workpapers are cross-referenced and references are made to supporting documentation. For public companies, CFO Consulting Partners offers SEC report preparation services (i.e., 10-Qs and 10-Ks, including MD&As).

Typically in an SEC and Pre-Audit engagement we:

  • Prepare or assist in preparing a full set of GAAP financial statements, including notes, and if applicable, the MD&A section
  • Research GAAP and disclosure issues and the application of accounting principles to a company’s facts and circumstances
  • For public companies, draft Form 10-Ks, 10-Qs, registration statements and proxy reports
  • Provide support related to SEC Comment Letters
  • Restate financial statements for prior period errors
  • Assist with preparing delinquent SEC filings
  • Assure a high level of quality control, as all engagements are reviewed by another partner

Benefits include:

  • Potential cost savings due to lower staffing needs or lower outside accounting fees
  • More available time for CFOs and Controllers to focus on internal company needs
  • Provision of accounting research. Many accounting firms do not provide this service to their audit clients due to independence issues
  • Development of accounting analyses, such as goodwill impairment, fair value accounting and IFRS reporting
  • Resource to answer SEC and auditor comments

Newsletter – October 2018

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Why Does it Take So Long to Close?

Paul Karr, Director, CFO Consulting Partners LLC

This question gets asked at companies of all sizes and industries. Legacy processes and systems, combined with growth in scale and complexity of the business and often multiple sets of accounting principles, are some of the reasons for this. In this article we suggest some ideas on how to address this challenge.
People, processes and systems are the three key elements of any finance function.   Each of these elements impacts the closing process, but the theme of this article is leveraging existing resources to see how the closing process can be improved within the context of the finance function’s existing resources.
Why start with the process, rather than implementing a new system, reorganizing or hiring personnel, or making other changes? For one thing, it’s more cost effective than making other, potentially expensive changes, particularly before the potential of the existing process has been fully realized. Also, implementation of a new accounting system necessarily requires focus on getting it done on time and on budget, which are obviously important objectives but take the focus away from process improvement, despite best intentions. The result can be automation of a suboptimal process, sometimes known as “paving the cow path.”
So where does one start the process work? We offer the following areas and suggestions for your consideration:
  • Closing period. Measure the days from the end of the accounting period to when the last journal entry has been booked and the financial statements have been prepared (the closing period). Not the day everyone wanted to be done, or should have been done, but the actual last day. If there are separate GAAP and regulatory financial statements and the timelines are different, they should be measured separately. The point of defining the closing period is to look at the true performance of the process as it exists today.
  • Closing activities. The activities during the closing period can be thought about in the following general categories:
    • Drivers of last entries. Having laid out the timeline(s), the next issues to explore are what the last entries are, and why they happen when they do. Dependence on information from operations or other functions outside of accounting may be a factor here.
    • Timing of activities. Further analysis of closing period activities can be done by putting them in the following buckets: (1) what can be eliminated (through standardization or other process improvements); (2) what can be done before the end of the accounting period (such as planning, estimates, some audit procedures); and (3) what can be done later.
    • Account reconciliations. These are sometimes done late in, or after, the closing period. This timing can lead to late entries, unnecessary differences between GAAP and Regulatory or Statutory Accounting Principles, or between parent and subsidiary financial statements, and concerns for top management, auditors and regulators. This timing is often seen as the result of resource constraints, but it can also be driven by issues with the reconciliation process itself and unavailability of timely data to perform the reconciliations. These process and data issues need to be addressed, but a quick way to address timing is prioritizing account reconciliations based on risk and performing lower risk reconciliations on a rotating basis and/or at non-peak times.
  • Documentation. Roles and responsibilities are usually not as clear as people assume. Even if they were clear at one time, changes in personnel and in demands on the process can create significant, undocumented changes that may need to be addressed. Also, a question that can be asked here is, “would a new employee know what to do?”
  • Calendar. This needs to be sufficiently specific not only to know who is to do what and when, but to be able to measure whether the closing process is on track.
  • Pain points. There is a great opportunity here to ask everyone in the process what’s bugging them, from those providing the input, to those doing the accounting, to those using the products of the process. Everyone loves to do this! The only imperative is, once all the stakeholders have been debriefed and all the issues are on the table, it is important to do something about those issues, and be transparent about what is being done and when, even if some action is deferred.
We hope some of this resonates with you, and you see some opportunities for “quick hits” that can help build confidence on the part of your staff that process improvement is achievable. We can help assess your closing process, tailor an improvement program and manage the resulting improvement projects to successful completion. Please let us know if you would like to discuss.

Newsletter – August 2018

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If You Like Physician Practices: You will Love Veterinary

John DeLorenzo, CFO Consulting Partners LLC

Following our introductory article introducing our healthcare practice, we followed up with an article that discussed the changing dynamics of physician practices.

As we serve our clients in healthcare practices, we are seeing significant opportunity within the veterinary practice area. This article titled – If You Like Physician Practices: You Will Love Veterinary, will tell you why.

While there are some larger corporations leading the consolidation of vet practices, think Mars, NVA (National Veterinary Associates) Blue River and VetCor, they generally target groups that have had some level of consolidation already. Mars targeted some of the larger consolidated groups such as Blue Pearl, Pet Partners, Banfield and VCA, while consolidators like Blue River out of Chicago will target individual hospitals. Groups like Veterinary Practice Partners and Community Veterinary Partners, both in Eastern Pennsylvania, will invest in and co-own practices with current owners.

While private equity has been active in vet consolidation, they are also investing in the consolidators, leaving early stage consolidation to others. Earlier this year Oak Hill Capital Partners, Harvest Partners and Cressey & Company recapitalized VetCor. Morgan Stanley Global Equity Partners invested in Pathway Partners Vet Holding. In 2017, Summit Equity sold NVA to Ares and OMERS and KKR invested in Pet Vet Centers. NVA and Pet Vet Centers valuations were rumored at EBITDA multiples of 13-15x while the Mars acquisition of NVA was at 18.2x according to bankers.

According to Forbes/Merger Market, smaller hospital acquisitions are fetching 8-10 multiples while smaller single practices in less desirable locations are getting 6-7x. A typical larger vet group can have EBITDA margins in the area of 15-20%, with smaller practices 7-18%. According to Simmons Veterinary Practice Sales and Valuations the industry average is 10-12%.

So, what we are learning? The vet business is healthy with an industry average of 10-12% EBITDA margins. Consolidators can acquire practices in the low to mid-teens multiple range, while growing margins as a result of creating a consolidation platform to 15-20% while increasing the valuation multiple as well. This is a recipe for good returns for investors while providing significant exit returns for sellers.

Also, it appears that the competition for buying opportunities is easier than that of physician practices as vet practices are in an earlier stage of consolidation than physician practices with the absence of hospital competition that exists in the physician practice area. Also, people love their pets and are willing to pay for more complex procedures that continue to develop in areas such as orthopedics, neurology and oncology.

While the vet business still has some of the “professional corporation” regulatory issues faced by physician practices, there is significantly less liability, payor issues (Medicaid, Medicare, private payor), and general regulatory issues to contend with than that of a physician practice. On a simplistic basis, these advantages seem to accrue while providing similar investment returns between physician practice and vet practice investments.

CFO Consulting Partners’ healthcare practice is here to help you as we are well versed in hospital, medical and veterinary practices. We can assist vet practices to prepare for an exit while providing private equity with assistance to prepare a consolation strategy, identify acquisitions and assist with due diligence and integration.

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