#192: M&A for FinTechs: The Role of a Fractional CFO
LISTEN AND SUBSCRIBE
Apple Podcasts | Google Play | Stitcher | Spotify
Welcome back to The Richer Geek Podcast! In today’s episode, we’re joined by Nicholas Spezio, M&A advisor at Exbo Group, to explore the world of mergers and acquisitions (M&A) for FinTech businesses. Whether you're a founder considering selling your startup or curious about the current M&A landscape, this episode is full of valuable insights you won’t want to miss.
Why You Should Listen:
Are you wondering if now is the right time to sell your FinTech startup?
Confused about how the current M&A environment is affecting valuations?
Worried about navigating the complexities of financial due diligence?
In this episode, we also discuss:
Uncertainty is Always Present: Learn how to adapt and embrace flexible deal structures to mitigate risks in M&A.
Tax and Legal Support is Crucial: Navigate complex tax liabilities and negotiate favorable terms with expert guidance.
Quality of Revenue Matters: Prioritize recurring revenue streams to achieve higher valuations in the sale of your business.
Manage Seller Expectations: Understand current market realities and consider earnouts to maximize future growth potential.
Financial Due Diligence Uncovers Risks: Identify potential tax exposures and negotiate settlements before closing the deal.
Fractional CFOs for Founders: Offload accounting tasks and gain valuable financial insights by utilizing a fractional CFO.
Right Buyer, Right Time: Focus on strategic alignment with buyers to ensure a smooth and successful exit.
Resources from Nicholas
LinkedIn | Exbo Group | Email
Resources from Mike and Nichole
+ Read the transcript
Mike Stohler
Everybody, welcome back to another episode of The Richer Geek Podcast. Today we have Nicholas Spezio. You got to say it this way, I think.
Nicholas Spezio
Yeah.
Mike Stohler
He's the M&A advisor. You know, we're going to talk a little bit about venture cap FinTech and how he can help us out. But he joined a company called Exbo Group in 2021 he leads the transaction services practice. He actively supports buy side, private equity venture capital clients through the full life cycle of the acquisition process. We're going to talk a little bit about how he supports the sellers as they prepare for the financial due diligence and all that stuff that we hate as business owners doing on our own. How are you doing, Nicholas?
Nicholas Spezio
Doing very well. Thank you so much for having me.
Mike Stohler
Absolutely. As we always do, give us a little bit about your background with you, how you got in this, why we should pay attention to you, as far as your expertise goes. What is your specialty?
Nicholas Spezio
Absolutely, I've spent almost 10 years in public accounting at Top 10 firms. Started my career at a mid-sized firm, and then transitioned over to PwC little less than two years into my career, and spent the majority of my years in public at PwC auditing big hedge funds based in New York City. Really wanted to make a partner. Loved the PwC experience, loved everything about it, a little bit of a glutton for the pain of the busy seasons and the long hours, and just really enjoyed it. And Exbo Group came knocking one day and during Covid, and they were small businesses at that point, there were only six or seven employees. And I was really interested in the prospect of helping to build out this practice and build this business with them. And I've been here for about three and a half years. We're close to 50 people at this point. We do two main things: we do Fractional CFO finance as a service business, ongoing finance support for venture-backed seed, Series A, Series B-type businesses started in FinTech, EdTech, haven't really diversified at this point. And then we also work with private equity backed businesses and some owner operated businesses. And then, as you mentioned, I lead the transaction services business working on both the buy side and the sell side. And we do a lot of technology deals, helping both buyers and sellers understand the nuances of transactions and really being able to understand where there could be potential issues in trying to mitigate and resolve those issues upfront and as quickly and as reasonably as possible.
Mike Stohler
So let's talk a little bit about, something in my world, you don't realize this seems like, whoever's in Washington, this isn't political or anything. But rules and laws change. This group wants to do it this way. This group wants to do it this way. How did you keep up? As far as you know, something like big VC groups and large private equity groups, when I say it's like, "Look, okay, I'm going to sell a portion of something, and I'm going to net $4 million and I do hotels, and all of a sudden it's like crap. Now here's 1031 but no interest rates are up, things and everything sucks, and everything's this, I don't want to buy anything right now."
How do you handle the differences between and how would you talk to someone? It's like, "Okay, I've got a sale coming up, but now maybe it's not the right time to sell." What are some of the things that you kind of your thought process of or, we need to put it into a deferred trust? Do we need to do some of the stuff with the money?
Nicholas Spezio
It's a great question, and I think it's one that there will always be something coming or some uncertainty, whether that's in the marketplace, whether that's an election, whether that's something overseas that is hard to really predict. I think getting the right tax and legal provider and partner with you is really important because they're going to be able to help you understand structure. And I think that there's a lot of interesting ways that you can really craft how the acquisition or the divestiture or whatever you're trying to do can be and one thing that we've seen this year that's been really interesting is a lot of equity swaps. So instead of a buyer taking on expensive financing from a lender and doing traditional leverage buyout, we're seeing more creative ways to change that control, or to merge or to come together with another business, where there's a lot of synergies and there's a lot of strategic benefits and positive outcomes that can come in a way that is tax effective, and you're not losing half of your money in terms of the acquisition.
For sellers, they typically want to structure the deal as equity deals, because the majority of the business is baked into goodwill for everything that they've built over these years, and the valuation that's put on top of the assets, or the net asset value, and then you're taxed at long term capital gain rates buyers, they obviously want to structure it more as asset deals that limits and mitigates their liability. And also there's some tax advantages for them in terms of refare, valuing their assets that they're purchasing, and then re depreciating those. But there's always a middle ground in terms of where you can get to with the buyer, if you're a seller, in terms of getting to a good place where it's mutually beneficial for both parties.
Mike Stohler
Yeah. And what are some of the red flags that you look at? So someone's going to look at an acquisition, and they're doing the due diligence. What are some of the ways you help them? I don't know some of the tax due diligence, or the financial due diligence, some of the red flags that you see that could help us listeners, if you know they're going through that right now.
Nicholas Spezio
Yeah, from a buyer's perspective, on the financial side, one thing that we always look at is the quality of the revenue and really understanding what's recurring versus non recurring. So being able to bifurcate between the two is a really important metric for us, and understanding what that concentration between the two revenue streams are, and then diving further into that, when you have that recurring revenue, how much of that is upfront, is it deferred revenue? Is it unearned? Is there a cost to service that revenue in terms of hosting, in terms of your customer support? And what does that translate into deal dynamics in terms of potential purchase price reductions or purchase price adjustment for the cash that needs to be held. Are there termination rights? Can customers get their full refund if they do cancel their contract? And what are those implications? And then there's also different types of analysis that you could look at in terms of churn, how many customers are you losing on a gross basis? How many customers on a net churn basis, in terms of looking at your upsells and your down sells and your churn? So there's a lot that we look at in terms of that. And then in terms of tax diligence, the risk is typically, you know, compliance issues, are they actually filing? And then is there any sort of sales tax exposure? The laws with SaaS and technology based businesses are really nuanced, obviously, from a federal level, but it varies significantly on a state level too. Certain states tax it, others don't.
There's certain Nexus implications that need to be thought about. So we've seen a lot of our clients this year identify those risks, identify the dollar value, and then go to the state and say, "Look, this is what we think our exposure is. We want to settle this, and we want to do it right and then, you know, kind of squash it before the deal is consummated."
Mike Stohler
What are you seeing, as far as the state, are they willing to play the game a little bit? Or they're like, "Oh no, we need the revenue right now and just do it." Or what are you seeing? What's the trends? And I'm sure different states are different.
Nicholas Spezio
Yeah. I mean, I think what we're seeing is states are receptive to when you approach them with potential issues, like you not calculating sales tax correctly. There aren't, there's a few programs and a few softwares that I think are the big names that do a good job. But for the most part, I think, ignorance is bliss. For a lot of sellers, you're focused on building and growing your business, getting new clients, retaining your clients, finding good employees and retaining those and I think there's maybe a misconception that serving SaaS and technology are not taxable, and that's just not the case anymore. And so I think states are receptive to in good faith founders going to them and saying, look like we think we have exposure. We think it's this amount based on what we've calculated, and we want to settle with you. And I think that's a good way to mitigate potential issues post close, and also mitigate what the potential holdback is of the purchase price if you are going to sell a technology business so you get more cash up front too.
Mike Stohler
Are you seeing a difference with, you know, in my space, the difference between what the sellers think the business is worth and what the buyers think it's worth. You know, it's like the sellers, it's like, "Yes, it is worth three times gross, four times gross, four years ago, before interest rates, before the economy." And the sellers are like, going, "Look, my DSCR, the debt to service income, the ratio is just not there. I can't do it." Are you seeing that in your world? And how are you resolving some of that? I know we talked about, maybe more of an equity deal. But are you seeing that as far as just this difference?
Nicholas Spezio
Yeah. I mean, definitely our clients are seeing that all the time. There's a great report that just came out from PitchBook that details the valuations for public companies and technology, CRM, ERP-type technologies, a variety of different kinds of technologies, but it shows the drastic decrease in valuations from 2021 early 2022 levels to today, and they've decreased significantly. I mean, in 2021 and 2022 when the markets were extremely hot, and everything was scorching. Sellers were able to turn their businesses over at ridiculous EBITDA multiples and revenue multiples. And that's cooled significantly, especially with the cost of financing being where it is today. And I think that there still is that element of sellers having some sort of unrealistic expectations.
And I think the way to sort of resolve that is, either from a seller's perspective, you have to be patient, and you just have to find the right buyer, even though that market is probably drying up because they see other transactions in the marketplace that are probably from an ebook perspective, or at 8 to 12 and on a recurring revenue, or maybe at four to six to eight, Depending on other elements, if there's payment processing involved, but one way to solve that is to structure a bigger earnout. If you are confident that your business is growing at a good compound annual growth rate, and you feel strongly about where you're going, structure more in potential earnings, and if you hit those hurdles, you get more money.
Mike Stohler
Yeah, I've seen somewhere the dollars to say, "Hey, we'll carry something, and to kind of get it going at maybe a reduced rate." And there's also some banks and some financial institutions, they're just like, they're cold now. They're like, "We're keeping our cash, we're not lending, unless there's an LTV of 40% or something like that." In your world is it more of a VC type of play instead of with banks and things like that.
Nicholas Spezio
My world is more private equity, Kevin and Eric, on the other side of the business, they see a lot of ventures that industry has definitely dried up significantly. There's less LPs and there's less dry powder in that industry because of some of the implications of some of the deals that went south, from those extremely elevated valuations to where they actually should have been. And so there's a little bit of bad taste, I think, adventure. And they're being much more strategic and much more careful and much more intentional in terms of the diligence that they're doing on the deals, the diligence that we've done on ventures in AI this year, and technology is very much more intense. They are very particular about the ARR that they're underwriting to and the contracts. And we're not seeing the number of deals go through the success rate that we did in earlier years, where everybody was just trying to deploy capital. Now it's like they'll eat that, you know, fees that deal fees because they want to get the right deal in place. So that's a big thing that we're seeing this year.
Mike Stohler
So how do you tell the seller, or how do you analyze with the seller that it is a good time to sell in today's market? Or are you telling them maybe they should consider waiting to a later period and what and when that period might look like, you know? How do you kind of grasp and tell that person? It's like going, maybe you should wait till after the election. Maybe you should see what middle 2025 looks like. How to even analyze something like that?
Nicholas Spezio
I don't know if you really can. I mean, it's like hindsight is 20/20. It's like there's never a perfect time to, "I wish I bought the house that I live in right now in 1999 or 2000." You know what I mean? But I bought it last year, and it is what it is. I got a higher interest rate, and I bought at an elevated price, but prices have continued to go up. In terms of real estate, in terms of business, it's the same thing. You don't know where the market is going to continue to go. And my recommendation is, if you're considering selling your business, you know everyone's story is different, and I think you need to be the one that really analyzes and thinks about what you want your future to be and what you plan on doing after you go through this process of selling your business. And I think the best exit events for both sellers and buyers are ones where they are aligned in terms of what is going to happen to this business. I mean, these sellers, these entrepreneurs, these people that have built these businesses over the span of 10-15, 20-30, years, there is significant, just sweat and blood and tears and sacrifice that has gone into these businesses, it's, it's truly like their babies, they care about them, and there's employees that work there that they care about, and there's customer relationships that they care about. And so making sure that you're comfortable with this decision and also handing it over to the right strategic partner is extremely important.
Mike Stohler
Yeah. I can see that, because you don't want someone in, for instance, a private equity group to go in and just slash, because all they want to do is make it look good so they can sell it another two years to another private equity group, right? And that's one of the considerations, isn't it?
Nicholas Spezio
I mean, that's the game, right? I mean, for the most part, you're buying a business with a timeline horizon of somewhere between three and seven years, and there's only a couple ways to increase the value of the business. You can be accretive through acquisition. You can continue to do add ons. But the other game is there's only really two levers. You have to sell more or increase your prices and get more customers or offer new services and products, or you have to figure out economies of scale and in operational synergies and not rate figure out how to cut your expenses, whether that be fire people or outsource or whatever it is, but you're going to try to improve your margins to make the business grow, be more profitable and be more desirable and more marketable for that next turn.
Mike Stohler
So let's talk about your company. We've kind of talked a little bit about what your group does and what you do. Ladies and gentlemen, exbogroup.com. E, X, B, O. They click on the site, go to it. What are they going to find, and what are they going to learn?
Nicholas Spezio
They're going to see a group of hungry professionals that are looking to help both buyers and sellers, investors in the lower middle market, small to medium sized businesses do two things. One, help businesses, venture backed businesses, private equity backed businesses, founder owned and operated businesses that need finance support. They need someone to help them with the ongoing accounting. They need someone from a fractional CFO perspective. They need someone to help them with forecasting their business, their cash run, their burn rate, their ARR their employee target.
Targets in terms of what they want to hire, and they just need someone in that desk to take care of that so they can focus on running the business. And then on the other side, they're going to see a group of professionals that are focused on M&A and doing transaction services, helping buyers assess the financial health of the target that they're acquiring, and making sure it's a good target and a good acquisition for them, helping them navigate the deal, and then on the sell side, it's helping sellers make sure they're not leaving any cash on the table, that they're understanding any sort of deal implications, any risks, any sort of potential purchase price reductions that they need to be aware of, and really putting them in the best position to succeed. If your audience is mostly founders and EdTech or venture, my advice to them is always to take your time in terms of going to market and making sure you're all buttoned up and you've crossed your T's and dotted your eyes and you know what's going on before you rush to the market.
Mike Stohler
To the listeners that are out there that just started their business, maybe they're three to five years into it, and those are different with the companies. When is a good time? When do you kind of know, as a founder, that you know what I need to up the game and get help. I have a little bookkeeper. I have my Excel spreadsheet. Now that I'm growing it's getting a little bit crazy. When do I need a CFO?
Nicholas Spezio
If someone hasn't told you, in terms of a board member, an advisor or an investor, that you need a CFO or fractional CFO, or a bookkeeper to come on to help you with this. I think you'll naturally know when you start to look at the books and you're like, where are we going? What is this number? Why do we have this? How much money am I going to have next month? Why is revenue down? Like when you start asking all these questions and you feel that angst and anxiety about your books, you know it's time to bring in someone who knows those answers, who's prepared to give you those answers, and that can help think, help you think about the business more strategically so you can forecast it for the next two or three years. Because as a founder, as an owner, the finances are important, but you should not be spending time focused on closing the books like you just need to know what you need to know to run the business optimally.
Mike Stohler
And what's the advantage of something the Exbo Group does instead of bringing someone in house?
Nicholas Spezio
I think the strategic value prop that we offer is that we have had hundreds of clients over the last seven years, spanning across various industries, various verticals, and with various investors in in various kind of stages of their life cycle, very early, pre-revenue businesses seed, Series A, Series B, private equity backed every single type of kind of strategy that you can imagine. And so I think we bring a wealth of knowledge and background and experience that we can really help craft the financials in the most advantageous way for that founder. And I think it's a nice way to kind of scale into something if you bring on a CFO professional services, CFOs are probably the most expensive they've ever been, just like everything else with inflation. So it's nice to be able to pay five to seven to maybe 10 grand a month to have an expo group or another fractional group that does what we do in house, and you can kind of scale up or scale down based on what your needs are.
Mike Stohler
Yeah, and it's fantastic. It's what I've learned with our Fractional CFO: it doesn't matter what you cost per month. If I get that back at the end of the year, two fold or threefold, it's like going, "Wow, yeah." It's because, you know, what I realized is, I had no idea I could save money in these different areas if I did certain things. I own the business. I am not the account. I don't want to be an accountant. I can't stand Excel spreadsheets. I just want to go out and buy assets, but they are beautiful. But what I don't know is like, all of a sudden, "Why aren't you doing this? Why aren't you doing this? You know, did you know you could do this?" I'm like, going, "No." They're like, "Okay, can you go back and give me all that five years ago from now."
Ladies and gentlemen, what Exbo Group does, and with the Fractional CFO works, especially that, and that's what I know, is the amount of money that you could all of a sudden, save on things that I didn't even know existed. Just setting up the LLCs a certain way, or just integrating things involving different ways that they do the taxations is just absolutely amazing. Before we let you go. Is there anything that I missed that you'd like to tell our listeners about your company or about what you do specifically?
Nicholas Spezio
The only thing that I would say is, whether you're buying a business as an entrepreneur through acquisition, a venture investor, an angel investor, or a wealthy individual that's looking to buy a business. It's really important that you know you spend the time, whether that's you engaging someone like myself or another reputable firm, but you do the due diligence on that target, and you really understand what's going on with it. You lift up the hood, you look underneath, you kick the tires. You understand how much gas is in there when they get their last oil change. You really do your diligence before you buy that business, because it's really important to know those things. It's really important to take your time and not rush to the finish line, even though it feels like there's a lot of pressure and from the sell side, if you're a business owner, it's it's sort of the same thing you know before you engage a banker or an advisor or a broker or go to market yourself, or answer that email or answer that, hopefully handwritten letter that an investor or buyer has sent you, make sure you're taking some time to really look in the mirror and know that you want to sell this business, because once you sign up for it, once you sign that LOI, you have a lot of people that are coming knocking on your door looking at everything. And you want to be prepared. You want to put yourself in the best position to win. You want to understand working capital. You want to understand the nuances of the deal so that you put yourself in the most favorable position. So I think really taking your time and finding the right partner is really important in terms of getting it right from an exit opportunity perspective.
Mike Stohler
Yeah. Now, do you mainly stick to US based, or North American based, or do you do some things around Europe?
Nicholas Spezio
We do. We've done some deals in Europe, we've done some deals in Canada, we've done some deals in South America, but I'd say the bulk, or the lion's share, is in North America. It's in the US.
Mike Stohler
Yeah, that makes sense, because it's man. Now, let's talk about the world stage and what's going on, it's crazy. It's going on.
Well, Nicholas, thank you so much. How can people find you? exbogroup.com. Do you have an email if they have questions, or LinkedIn?
Nicholas Spezio
Yeah, LinkedIn is great. You can always email me. nicholas.spezio@exbogroup.com and we'd love to hear from anyone that is in your audience.
Mike Stohler
And Spezio. S,P,E,Z,I,O, ladies and gentlemen.
Nicholas, thank you so much for coming on The Richer Geek Podcast and have a great night.
Nicholas Spezio
You too.
The information, statements, comments, views, and opinions (collectively, “Information”) provided in this podcast are not intended to be and should not be construed as financial, economic, legal, accounting, tax or other advice. For our full disclosure, click here.
ABOUT NICHOLAS SPEZIO
Nicholas Spezio is an M&A advisor at Exbo Group, leading their Transaction Services practice. He has extensive experience supporting buy-side and sell-side clients in the FinTech, SaaS, EdTech, and other technology sectors.
With over 50 deals under his belt, Nicholas has worked on notable transactions such as SurePoint Technologies' acquisition of ContactEase and Aquiline Technology Growth's investment in Helcim. He holds a BS in Accounting from Ithaca College and an MBA from Saint John Fisher College, as well as a CPA from New York State.