CUSTOMER PROFILE
Technology/ SaaS
Headquarters
Major East Coast Metropolitan Area
CloudServ (not the company’s real name) provides value-added Cloud Services, Managed Solutions, and Optimization Services to businesses in varied industries through its partnership with a leading cloud computing provider. G-Squared was hired as an outsourced CFO in June of 2019, as CloudServ’s CFO was leaving the Company to pursue another opportunity. We quickly determined the books and records had not been maintained appropriately; most urgently, there was a significant dispute about how much CloudServ owed its principal vendor.
Shortly thereafter, partly due to the Company’s poor financial performance, CloudServ’s bank rescinded its line of credit, leaving the Company without access to external funds, constraining its ability to address its operational challenges.
Challenge
Operational challenges, a rescinded line of credit
G-Squared established our credibility and expertise by cleaning up the Company’s books, improving management/board reporting, and resolving the issue of payments owed to the Company’s principal vendor. During this time, the Board made additional organizational and operational changes, in which we were asked to be directly involved. As such, the G-Squared Managing Director was asked to join the Board of directors.
Unfortunately, due to the items discussed above, the economic impact of the COVID-19 Pandemic, as well as other internal challenges that were beyond G-Squared’s sphere of influence, CloudServ limped along for two years as its client base and revenues declined. This caused a number of internal disputes among various Board members. However, G-Squared was seen as a voice of reason and we provided the Board the financial information and guidance it needed to face the reality of the Company’s situation. The Board came to the right conclusion that CloudServ needed to be sold.
The Board engaged an investment banker who used his industry contacts to identify potential acquirers. During this time period, the Board evaluated several offers that unfortunately did not come to fruition. At the same time, the Company’s CEO located a potential buyer that wanted to enter the Cloud Services space and decided it was better to do so by acquiring CloudServ, despite the Company’s challenges, rather than attempting to start from scratch.
Approach
Strategic negotiation, due diligence
We worked to prepare the Company and participated in the due diligence process, subsequent negotiations, and the close of the transaction, all of which occurred remotely due to the COVID-19 Pandemic. The deal closed in only two months, despite the lack of face-to-face interaction. All of CloudServ’s employees kept their jobs. As for the Company’s original investors, its convertible noteholders were paid off in full and its preferred shareholders recovered about half of their original investment, which was much more than originally expected. The buyer, recognizing the quality of work and expertise G-Squared brings to the table, continues to utilize us as their outsourced CFO.
Lessons Learned
Accounting is the root of a successful business
There are a few important lessons to learn from this company’s experience. First, while accounting and bookkeeping may seem mundane, failing to keep the books in good shape can have a domino effect – you may not know how much you owe to important vendors, or how much your customers owe you. Your bank may lose confidence in your business and withdraw access to credit, which may not be easy to replace. Outsourcing CFO and accounting services to qualified experts can prevent these kinds of problems from happening.
Second, Boards need clear, unbiased information about a company’s financial condition – it is not possible to make rational decisions in the best interest of shareholders and other stakeholders without it. Third, being well prepared for the due diligence process gives potential buyers the confidence to proceed with a transaction, even when the financial picture is not necessarily rosy. Finally, the sale of a struggling company may not make investors whole, but having a realistic view of the alternatives and taking action to pursue the path that offers the best way forward is in everyone’s best interest.
