Skin in the Game. Jim Gilreath
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the CEO, the banks, and any Limited Partners who typically are also board members. Building trust with the management team is almost as critical.
The competent and proven CFO is required to have the unquestionable traits of integrity, expertise, skills, and convictions to challenge the portfolio company’s CEO and management team on key strategic and tactical decisions. The private equity environment revolves around the PE Partners craving a unique dashboard highlighting cash flow, margins, and leverage ratios. PE ownership believes that numbers speak louder than words. A CFO should fit the PE firm’s strategic plan profile. Those CFOs heavily experienced in organic growth are better at performance management and containing costs. If the strategic plan is heavily M&A focused, the preference would be for a CFO with significant transactional experience and industry insight. A CFO with heavy turnaround experience or consolidation expertise, who is helping businesses get ready for sale, would not typically be ideal for a company facing a dynamic growth situation.
A CFO needs a balance of technical and leadership skills. Their responsibilities can span strategic planning, analysis, preparation, and presentation of monthly financial reporting including:
Generally Accepted Accounting Principles (GAAP) financial statements
Bridges
Key performance indicators
Weekly rolling forecasts
Budgeting
Credit, collections, and cash management
Financial and tax audits
Policy, procedure, and internal controls
Compliance processes
Cost accounting (standard and average costing)
Product costing
Capital expenditures/depreciation
Contract review
PE partners are hungry for details and fussy about presentation. The typical CFO mantra is, “No shocks, no surprises.”
The CFO is responsible for compiling the numbers; they better be accurate! Expectations are usually high, demands from constituencies countless, and tight deadlines numerous. The typical CFO must be a “stand up” executive, impartial and passionate, even ruthless when necessary. The CFO reports directly to the PE firm Managing Partner with a dotted line to the company CEO. CFOs are the main conduit of information flow to the PE ownership and the company CEO. He often has to balance completing the priorities of the PE ownership and the company’s management team. This balancing act can be especially difficult if the business is performing in a downward trend.
The PE ownership often puts the CFO on the spot and asks the CFO’s opinion about the portfolio company’s tactical plans to increase the top line and the company’s chance of success. In a middle market portfolio company, it is rare that a controller is promoted to CFO because it would be on the job training. However, M&A expertise is not always required of the CFO since the PE firm typically has that expertise. However, past experience with integrating acquisitions in partnership with operations is valuable. Familiarity is beneficial with IT systems, processes, and controls, particularly Enterprise Resource Planning (ERP) software implementation.
CFOs typically know how the entire day-to-day company works and how the various departments fit together. The CFO is continually involved in operations and is seen as the non-stop furnisher of their financial data requests. He projects a sense of urgency and surrounds himself with passionate “all hands on deck” subordinates. The CFO typically needs a strong experienced team including a solid financial controller to help maintain control over the financial function and enable him to deal with wider issues and requests. Hiring, managing, and retaining solid subordinates is typically a major challenge as the CFO will surely fail without adequate direct reports. The CFO’s leadership approach creates an open, collaborative environment that sparks ideas and results in cross-functional, consensus-driven solutions.
From day one, the hands-on CFO must know the company’s P&L and work on improving cash management, credit/collection, working capital, EBITDA, and profit margins. The CFO drives value creation, guards against unnecessary company spending, and meets debt covenants and all deadlines. He alerts the PE ownership and the CEO to potential problems and will challenge sales forecasts and undocumented assumptions from the various departments and satellites.
The CFO must keep a number of different constituents satisfied which requires timeliness, execution, results, good communication skills, and adequate analytical and consensus building attributes. The CFO must share the company’s financials accurately, transparently, on time, and be willing to clarify what insights his numbers should signify to the PE ownership as well as the company’s management team.
The CFO is the strategic Partner spearheading the portfolio company towards the most attractive exit or liquidity event culminating in the greatest value creation for all the equity stakeholders. If he has any time for reading, the CFO should bone up on How to Win Friends and Influence People by Dale Carnegie. When change management collaboration is important to a company’s transformation and growth, people skills become almost as important as the numbers. Peers must be treated as people rather than just functions. Healthy debate and conflict are part of wrestling with company issues and their solutions. This consideration calls for teamwork, versus the Lone Ranger approach, to reach an action plan consensus going forward, and keeping goals and objectives on track.
Many otherwise highly qualified, interested, and desirable CFOs do not survive their peer and subordinate reference checks, giving feedback such as, “He’s caused too many personality clashes, even in routine dealings.”
The CFO has a major involvement in planning and executing an exit from the PEGs. Typically the exit was four to five years, but nowadays, given the market conditions, the exit is more like six to seven years and counting. I have read that turnover of the PE backed CFO has significantly increased from 2009 to 2013. In my twenty-eight years’ experience, if the CFO is an A player and a good fit with the portfolio company’s PE owners, and after exhaustive due diligence, job screening, and some of his skin in the game, there won’t be any CFO turnover during the typical four to five year employment lifecycle.
The CFO is usually a master in due diligence, but must keep his eyes wide open in entering into his own CFO employment situation. There are issues to flush out before accepting a job offer, even with some skin in the game.
Can you meet the board? What type of company culture are you feeling and is it giving you culture shock?
Are there too many CPAs and/or former CFOs in the PE firm overlooking your shoulder with what seems like daily requests?
Ask to speak with a few CFOs of other PE firm owned portfolio companies to learn their management style
Is the portfolio company you might be joining highly leveraged?
Can the portfolio company’s management systems deliver the data needed by all concerned?
How long does the PE ownership typically maintain its holdings?
Meet the CEO. Is he the former owner or is he new blood outside the industry? How much skin in the game do the CEO and the rest of management team have?
The above criteria for CFOs of PEG’s portfolio companies in the aggregate is overwhelming, but it is unlikely that any SITG CFO candidate has mastered them all. I am providing a hiring pattern of similar traits and requirements to help SITG CFO candidates with aspects particular to hiring skin in the game CFOs.
What do PEGs seek in their VPs of sales and marketing?
PEGs for their middle market portfolio company typically want a VP Sales and Marketing (S&M) who has been a significant part of one or more successful related portfolio companies owned by private equity and can land on his feet running. He must be a high energy hands-on leader by example who manages subordinates with a focused sense of urgency. The VP S&M champions the fact that in this