The shoes of the private equity portfolio company (Portco) CFO are not easy to fill. As former Portco CFOs and experienced executive recruiters in this space, we know that the successful performance of the CFO role is high on the shortlist of drivers for Portco success. It is a small group of financial leaders who are up to the challenges and high stakes environments of financial leadership within a Portco environment. It is essential to get it right. What does right look like? The following are questions to ask to assess if the individual in your financial leadership role is the right business partner to deliver on the strategic plan.
Controller vs CFO?
When acquiring a founder-led company, it is often the case that you have also acquired a strong or maybe not-so-strong Controller with the deal. Many times, you will find that CFOs in title may in reality be Controllers as to the skillset needs in a Portco environment. The skill gaps are usually easy to identify in your interactions. Where does the individual focus their efforts? If their sweet spot is in the Controller role, they may focus solely on the financials and be less engaged or silent in communicating the underlying implications the numbers convey from a business standpoint as well as opportunities for EBITDA improvement. They may generate boilerplate KPI’s or standard MDA’s but lack the analytical skills to go deeper. An accounting-only oriented (Controller) style CFO may meet the needs of less sophisticated environments, but they will not be the value-add business partner you require to achieve targeted results and execution of your strategic plan.
Finance, Operations, and Cross-Functional Impact?
Finance vs Operations is an “and”, not an “or” for a Portco CFO. Deep operational competence and cross-functional leadership are essential. Whether they are leading some non-finance functions or working closely with them, the Portco CFO needs to bring a broad business sophistication and analytical abilities beyond the doors of the Finance suite. Is your CFO conversant and proactive in areas such as pricing methodologies and strategies? Do they assist revenue generators in taking actions to improve gross margins? Are they working with operational leaders to improve efficiencies that remove costs? Are they instrumental in influencing decisions on the plant floor? Do they add value in dealings with customers, vendors and suppliers? Operations-focused CFOs deliver value across the business.
Do you see the fruits of a high performing FP&A function?
Portco CFOs need to establish comprehensive analyses to drive and support the company’s most important decisions and resource allocations. Ideally, he/she will identify key drivers of the business. They will work to cut the P&L every which way, identifying margins and EBITDA contributions for all aspects of the business, clearly communicating implications and recommendations for improvements. This requires a deep understanding and appreciation of financial planning and analysis (FP&A) and have the skills and desire to instill this discipline as a key aspect of financial management. Effective CFOs play leadership roles to ensure the design and implementation of processes, systems and reporting support this work. Less sophisticated financial leaders cannot easily take it beyond the P&L to ensure cash and working capital implications, cash conversion cycles, etc. are modeled realistically across scenarios. Key management decisions need to be supported by this sort of comprehensive understanding of the business, its operations, EBITDA, and working capital.
Depth as to analytical capabilities around working capital?
Portco CFOs need a deep understanding of working capital dynamics, cash forecasting and cash conversion cycles in order to support the CEO and management team in delivering on targets for EBITDA, company valuation, and ultimately ROI. This is an expertise that is often lacking in less sophisticated CFO’s and Controllers. This is a relatively easy area to assess with your current financial leadership. How does their forecasting model drive a balance sheet? Can they articulate the working capital drivers and dynamics? Are they reporting on these measures, and more importantly taking the next step to influence business decisions for improvement?
Do they have it before you ask?
Fundamentally, a Portco CFO should be a step ahead of your requests, anticipating what is important and structuring their work accordingly. Are they proactive in creating a highly functioning finance function? Do they know how to efficiently scale infrastructure and operations to support growth? Do they know the kind of information you need and want and have it ready before you have to ask? Can they go from the numbers to make recommendations and through completion of improvement plans? Not every CFO can. It originates from their drive, experience, expertise as well as their leadership abilities and style. We raise the likelihood of success in this area by requiring our candidates have a track record of Portco success. Also, our Candidate Due Diligence process, which includes behavioral assessments, identifies individuals with the traits needed for success.
Are they an effective leader and change agent with executive qualities and presence?
Lack of qualitative leadership skills is often a major driver for making a CFO change. Rapid growth and organizational change require an effective change agent in the CFO seat. One who can lead, inspire and build confidence and trust with the executive team, PE firm, management and staff as well as with bankers, customers, vendors and other key third parties. They use these skills to lead M&A processes, integrations, large scale projects and to positively impact culture. These softer skills can be particularly valuable in multi-company, multi-location environments, or when implementing an acquisition strategy, combining diverse organizations and cultures. This skill area can be more easily observed from board meetings, understanding their interactions with bankers, auditors, and attorneys, and getting feedback from their peers and staff. Many CFOs are technically competent while falling short of the leadership skills needed to fulfill the role of valued business partner.
Upgrading the CFO seat in your portfolio company is an important decision that will impact company EBITDA and valuation. Value added contributions will emanate from this change when completed successfully.
Harvest CFO is The Premier CFO recruiting partner delivering the right permanent and interim CFOs for middle market private equity portfolio companies. Let’s discuss the CFO needs in your Portcos. Call Don Hillier, Managing Director and CEO at 216-609-3033 or email firstname.lastname@example.org.