Debt, M&A and AI in finance come to the forefront
It should be no surprise that debt and access to capital soared as an area of focus for finance leaders in Grant Thornton’s CFO survey for the third quarter of 2024.
The upcoming election, rising unemployment and potential interest rate reductions are contributing to a volatile environment that has reduced CFOs’ confidence and had 40% of them ranking debt and access to capital as one of their top three areas of focus for the next six months. That’s a rise of 12 percentage points over the previous quarter, and a 10-quarter high in the survey.
Meanwhile, the Financial Times recently reported that companies have been issuing large amounts of U.S. debt to avoid market turbulence with the election approaching in November.
“Companies are trying to hedge against interest rate changes and possible market changes related to the election, and issuing debt may help them accomplish that,” said Grant Thornton CFO Advisory Services National Managing Principal Paul Melville.
The survey's responses about debt and access to capital indicate that leaders should carefully consider their own debt and capital options, while CFOs should account for debt covenants appropriately as they enter into new arrangements.
The difficulty of this accounting was underscored during a meeting of FASB’s Private Company Council (PCC) in April, when it was revealed that PCC members identified FASB’s debt modifications and extinguishments guidance as their second-highest agenda priority item as they consider potential GAAP alternatives for private companies.
Complicated accounting for debt agreements may require techniques such as the amortization of bond discounts using the effective interest rate method that demands a high level of technical specialization — and perhaps the assistance of third parties.
“Accounting for debt agreements introduces a lot of complexity that many companies aren’t equipped to handle,” said Grant Thornton CFO Advisory Services Manager Kelly Kidwell.
Sometimes it’s even helpful to keep the accounting implications in mind while writing the debt agreement. If some of the complexity can be eliminated before a covenant is even created, it can pay dividends later.
It’s usually best to tackle these complicated accounting considerations as soon as possible.
“If you don’t get the accounting right, you can have material weaknesses in internal controls, errors identified by your auditors, and other problems that aren’t good for your business,” Kidwell said. “That’s why it’s better to take care of this on the front end.”
M&A uptick expected
Two recent Grant Thornton surveys have shown that M&A volume is set to increase as it’s anticipated that upcoming interest rate reductions will make financing for deals a bit easier to secure.
Fifty-four percent of CFOs and 67% of M&A professionals said they expect deal volume to increase in the next six months. This expected uptick has the potential to deliver value to both buyers and sellers, but only if they’re prepared to go to market. Sellers who want to stand out in a potentially crowded market need accurate valuations to fully understand the appropriate price point for their assets. Buyers need to have third parties prepared to promptly analyze a seller’s quality of earnings and perform business diligence to give themselves a chance to present winning bids on popular assets for sale.
“A good valuation requires more of your time and more information than you might expect, so it is important to begin that process promptly to ensure that you have the results in time to make well-informed decisions,” said John Seidensticker, CFO Advisory Services Principal for Grant Thornton. M&A also presents accounting considerations that may be challenging for companies and might require third-party assistance. Depending on the specifics of the deal, identification and valuation of intangible assets, valuation of contingent considerations and appropriate allocation of the purchase price all can require a significant amount of specialized skills — which may not be abundant at companies that don’t regularly participate in M&A.
Finance gets more efficient
Grant Thornton’s CFO survey showed that 66% of finance leaders expect their IT and digital transformation expenses to increase over the next 12 months. This marks a 15-quarter high, illustrating the extent of the efficiency that CFOs are driving through technology modernization.
Among CFO survey respondents who are using generative AI, 61% use it for finance operations and processes, and 73% use it for data analytics and business intelligence. The expectation is that the adoption of AI will not only reduce costs, but also catalyze opportunity identification for their organizations.
As organizations identify key areas in which AI can add the most significant value, decision-makers can benefit from applying a use case prioritization framework. This approach effectively evaluates and prioritizes opportunities based on their alignment with business goals and the effort required for implementation.
“Capturing, scoring, and triaging AI use cases ensures that valuable ideas are evaluated consistently and fairly,” said Grant Thornton CFO Advisory Services Managing Director Patrick Boruta. “This process helps prioritize initiatives with the highest potential impact, fostering innovation and efficient resource allocation.”
From AI capabilities to M&A opportunities to securing capital for the future, there’s a lot for CFOs to consider in the coming months. Even amid economic turbulence and the uncertainty of the election, finance leaders have the ability to make important moves that will make a difference during the volatility — and when the economic concerns recede.
Contacts:
Paul Melville
National Managing Principal, CFO Advisory Services
Grant Thornton Advisors LLC
Paul Melville is national managing principal in Grant Thornton Corporate Finance group and is located in Chicago.
Chicago, Illinois
Industries
- Construction & real estate
- Healthcare
- Manufacturing, Transportation & Distribution
- Retail & consumer brands
Service Experience
- Advisory
- Restructuring and turnaround
John N. Seidensticker
Principal, CFO Advisory Services
Grant Thornton Advisors LLC
John has been with the Valuation %26 Modeling Group at Grant Thornton for over sixteen years. His experience includes engagements involving the valuation of businesses, intangible assets and financial instruments for tax, financial reporting, corporate planning purposes, and litigation support purposes.
Denver, Colorado
Industries
- Technology, media & telecommunications
- Energy
- Private equity
- Hospitality & Restaurants
Service Experience
- Valuation
- Commercial and growth
- Transaction advisory
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