Fractional CFOs can help microcaps with their unique challenges using many of the same techniques applicable to private companies. A little bit of a tangent this week from financial analytics topics and a dive into the practicalities of CFO work and how it integrates into investor relations and value creation. I’ve worked with private companies to optimize their financial operations and strategy. However, a recent conference opened my eyes to an unexpected parallel: microcap public companies face many of the same challenges as my private clients, but with the added complexity of being publicly traded.

A microcap is typically defined as a publicly-traded company with a market capitalization between approximately $50 million and $300 million. These are considered very small companies in the stock market. Microcap stocks are often characterized by low liquidity (more on that in a minute), higher volatility, and almost no analyst coverage compared to larger cap stocks. They may trade on major exchanges or over-the-counter markets. It’s important to note that the exact definition of a microcap can vary depending on the source or context. Some definitions might include companies with market capitalizations up to $500 million or even $1 billion in the microcap category.

These tiny public entities often find themselves in a precarious position. Their finance departments are typically not built for scale, struggling to handle both the growing demands of the business and the rigorous requirements of public company status. This realization presents an intriguing opportunity for fractional CFO services to bridge a critical gap.

Value Creation Drives Liquidity

One of the most pressing issues facing microcap companies is liquidity. Not balance sheet liquidity, though that may be an issue as well, but trading liquidity is what I mean here. These stocks often suffer from low average dollarized trading volume. This means the average value of shares traded daily is thin, making it difficult for investors to buy or sell shares without significantly impacting the stock price. This lack of liquidity can deter potential investors and limit a company’s ability to raise capital. Fractional CFOs can help microcaps address trading liquidity in the following manner:

• Implementing robust financial reporting systems to increase transparency and investor confidence
• Developing strategies to improve market visibility and attract more diverse investors
• Advising on capital allocation to potentially improve the company’s financial health and attractiveness to investors
• Raise a substantial structured round of financing (not through the public market) similar to a venture capital investment that elevates the profile of the business
• The above strategies primarily focus on raising valuation, which has the indirect benefit of increasing liquidity

Building a Foundation for Investor Mindshare

The one difference with private clients is the heavier need among microcaps for investor relations that mesh with the financial infrastructure and reporting of the business. In order to make this work efficiently, two of my main strategies for all of my clients apply here without question: a program for due diligence readiness and implementation of a value creation plan.

A program for due diligence readiness ensures that all aspects of financial and related operations are designed to produce information for investors in a snap. This enables microcaps to have highly informative and productive meetings with prospective investors, subject to regulation FD requirements.

Such due diligence readiness is not easy and takes time to implement. Having one financial model that acts as both a monthly budget and a 5-year forecast helps immensely to launch this approach in my experience. This cuts down on modeling cycles and alignment of projections. Integrating this forecast into a reporting flywheel that is lightweight and repeatable is an important step too. Armed with this functional forecasting capability, leadership can think through its business model cohesively and can speak purposefully about their prospects to investors. These are just the initial steps as there is much more to this.

Value creation planning comes out of private equity, and is based on common sense financial strategy and financial operations alignment and easily applied to microcaps. I work closely with management to establish a working plan focusing on the following areas. These are things you need to be discussing at least quarterly, preferably monthly.

• Operational improvements: Enhancing efficiency, reducing costs, and optimizing processes.
• Revenue growth: Expanding into new markets, developing new products, or improving sales and marketing strategies.
• Strategic acquisitions: Identifying and integrating complementary businesses to create synergies and expand market share.
• Financial engineering: Optimizing the capital structure, improving working capital management, and implementing tax-efficient strategies.
• Management enhancements: Strengthening the leadership team and aligning incentives with value creation goals.

Exit strategy: Planning for the eventual sale of the company, either to a strategic or financial buyer.

The Investor Relations Tangent

Privately-held clients typically have smaller shareholder groups and investor relations is a more manageable process. This is especially true because a trading price doesn’t exist to trigger more interactions with the shareholders. In a public market setting, this relative simplicity does not exist and the financial operations function must drive messaging alignment and cadence across the organization.

This alignment is critical to take advantage of less conventional ways to get the company’s investment messaging out through the following channels, subject to regulation FD restrictions:

• Social media and digital platforms to reach retail investors directly
• Non-traditional investor events and more formal roadshows
• Utilizing video content to tell the company’s story more engagingly
• Strategic partnerships with larger companies for increased visibility
• Long-term investors who buy shares through structured deals (as mentioned above)

Disclosure Issues Unique to Microcaps

Microcap discounts and illiquidity are also driven by governance and disclosure transparency. A microcap with a strong handle on its business and prospects, beginning with the strategies outlined above, can present all of the disclosure and transparency of a full reporting company without being registered. This is identical to a private company just practicing excellent communications and financial disclosure to its investors. At the end of the day, a well-managed company will have the information to drive investor transparency and interest and the registration with the SEC, while an obligation to registered companies, should not be the driving factor.

Effective Leadership in Finance

For microcap companies, bringing on a full-time, experienced CFO with the requisite level of strategic credentials can be cost-prohibitive. This is where the fractional CFO model can enable a microcap company to leverage all of the required know-how without being priced out of the market. It can also ensure continuity, because an internal CFO appointee might leave the company for personal reasons at any time. Having a reliable accounting function inside the company and a reliable auditor and legal team externally for SEC compliance are critical to create the operating leverage required by the fractional CFO to deliver the right mix of strategic finance and financial operations to help the business succeed and appreciate in value.

The unique challenges faced by microcap public companies present a compelling opportunity for fractional CFO services. By bridging the gap between private company roots and public market demands, we can help these small but ambitious entities navigate their financial challenges, improve market visibility, and set the stage for sustainable growth.

FAQ: Fractional CFO Services for Microcap Public Companies