For Portfolio Companies: Does Your CFO Do This?

What a Private Equity-backed CFO Should Look Like

In any company, you could argue that the CFO is the second most important person next to the CEO. In a private equity-backed concern, it’s even more true. The CFO not only keeps the ship sailing, but s/he also sets up and maintains all of the KPIs, the dashboard, and most importantly, manages the financial relationship with the PE owner, either fostering trust and reliability, or not. S/he also supports the CEO as his/her confidant and guidepost.

So how do you find a good CFO and if you have one, how do you know if s/he measures up? Over the past nine years, and countless CFO placements, we have found consistent themes that serve as harbingers of success and how well a candidate will pan out in this crucial role under pressure, from hire to exit.

Here are the top eleven things to look for:

  1. P&L Size Experience – For most of our clients in the $100MM - $1B Revenue range, we won’t often consider a CFO who has not managed a P&L of at least $300MM. You can make whatever case you want, it doesn’t usually end well if you bring in someone from a smaller environment and expect him/her to learn on the job. Acting as a CFO of a $50MM company is simply different than in a $300MM+ company. You must have done it already. It’s not as huge a leap if you’ve been in a $300MM company and want to jump into a $700MM company, but the jump from $50MM to $500MM+ is big. Likewise, we don’t want someone from a $1B+ company to jump into a $100MM. We must see some indication that you have been successful in the middle market. Our PE clients are risk averse and already manage as much risk as they want. There’s no need to add additional risk to the equation. So, as one of our clients likes to say, go get that experience on someone else’s dime.
  2. Exceptional Technical Skills - It goes without saying, but this person should have exceptional technical skills. Most often, we go out looking for a CPA (not necessarily active, but registered); we do give a bit on this parameter for folks who have come up through the ranks and know their stuff. But it’s a great starting point.  We also home in on candidates who have started in the big Four with audit experience and then ventured out into a company career. Even better if they started their first couple of years after public accounting in a large corporate setting where they learned real world best practices which they then took into the middle market. That is our ideal path. It doesn’t always work out that way for some candidates, but those folks catch our eyes.  We do not love former investment bankers for the CFO roles (I can say that as a former investment banker myself!). While they can model and do accounting, they haven’t had enough roll up their sleeves technical experience in an FP&A role, in a Controller role, nor enough operational experience to warrant serious consideration. One of my favorite senior CFOs in the world has a preference to only hire CFOs who are excellent Controllers since he feels it is imperative that they could close the books if they had to. In line with all of the above, it goes without saying (but I’m saying it anyway), that the CFO is also the king or queen of KPIs and dashboard reporting and better have an exceptional understanding of what that means. It’s the lifeblood of information transfer for the PE and it helps a company to know how it’s doing every minute of every day.
  3. Prior CFO Experience. Another hard pill to swallow for many candidates is that we focus almost exclusively on candidates who have already been CFOs, preferably in a standalone company, not divisional leadership. It is a different animal to serve as a company CFO as opposed to as a divisional leader. There are shared services, often a divisional CFO doesn’t manage lending or cash management, they don’t always lead acquisitions, and they have the parent’s brand (and pocketbook) to leverage. PEs want to know that this person can stand on his/her own two feet, in any situation.
  4. Industry Expertise – While it’s not as directly critical that the CFO have incredibly deep industry knowledge as say the CEO, it is still very important that this person have a solid understanding of the ins and outs of the industry and the relevant accounting nuances, the right measurements to use for the industry, etc. If you have been in tech and want to go into manufacturing, you would have to learn standard costing on the job which is not going to happen. We get pretty narrow in our industry focus as well, it can’t just be manufacturing, it needs to be manufacturing with raw materials, or with low volume, high customization, or batch, or whatever it might be. In private equity, there is little to no room for learning on the job. Your CFO should know the basics of his/her job when s/he walks in the door day one.
  5. M&A Expertise – And a lot of it. Not a transaction guy, but someone who has been around the block in terms of acquisitions – both in terms of number of acquisitions s/he has led as quarterback, but also in terms of size range – has s/he led acquisitions from the smaller end up into the $100MM range or has it been limited to smaller only? And the candidate has to have led the acquisitions alongside the CEO, s/he cannot just have played a role. There are transaction junkies who proffer their deal sheets, but these folks end up less interesting on other fronts, so they aren’t usually the best fit. And there are folks who have only worked on maybe 3-5 deals over the course of their career, which doesn’t lend comfort to the private equity guys that this person could lead complex and numerous deals. Ideally we like to see about 8-10 or so deals ranging in size from $25MM to $100MM+ skewed toward the upper end.
  6. International Experience – If the portfolio company has any operations or sales exposure overseas, it is usually required that the CFO has managed overseas finance operations and/or led overseas acquisitions before. There are so many facets to this including having dealt with the vagaries of foreign exchange and mitigating exposure risk via hedging strategies, etc, IFRS, having had success managing controllers and/or finance teams that are an ocean away, dealing with other countries’ regulatory and/or reporting requirements, as well as dealing with cultural differences seamlessly.
  7. Managing IT and ERP Implementations – In a PE-backed situation, the IT landscape is often in motion. Either the ERP is being upgraded upon acquisition, or it’s being integrated with multiple systems of targets who have been acquired. Ensuring that the process goes smoothly and integrates seamlessly with the intense reporting requirements for a PE-backed company is essential. Ideally a candidate will have led more than one implementation across several different systems. The actual systems don’t always matter since it’s more about making sure the candidate is equipped and technologically capable. The CFO and IT are married and need to function well together. Overall, the CFO needs to be adept at “leveraging technology”, the application of which changes rapidly as the Company scales.
  8. Steel in the spine – Otherwise known as “managerial courage”. Even though this is toward the end of my list, I cannot stress the importance of this quality. We only look for CFOs who intuitively understand the delicate balance of serving as the CEO’s right hand while also managing the relationship with the PE separate and apart from the CEO. Our PE clients want a CFO who will keep them informed at all times, good news or bad, and be completely transparent. In reality, they also rely on this person to rein in the CEO if s/he starts to go maverick or even if s/he simply is considering a decision that is not fiscally responsible. The PE expects that the CFO will not be a yes-man, but will weigh in and carry weight, helping the CEO to think clearly about the fiscal concerns; as important is someone who is not afraid to stand up to his/her CEO when necessary to protect the interests of the company. If the CEO has been hired well (a subject for another day!), this will not be an issue. But unfortunately, too often, it does happen, and the CFO needs to suit up and show up and serve both of his/her stakeholders appropriately (and with the utmost respect).
  9. Executive Presence – What does executive presence look like? When s/he walks in the room, people notice and when s/he opens his/her mouth to say something, people listen and it carries weight. CFOs with executive presence are confident, not arrogant, but are also warm and engaging, able to inspire and influence those around them. Accountants can be very serious, and shy, or reserved. But good CFOs are people people and think about the context of the numbers, the story of the business, and the impact of decisions. They engender confidence in their CEO, in their board of directors, and in lenders, not to mention their reports and the overall employee base. They collaborate, they work well cross-functionally, and they care about more than just the numbers. They don’t necessarily cross the line into being a COO, but they do understand operations and sales and how finance is there to serve those areas, not direct them.
  10. Prior PE Experience – While this parameter is not always a requirement, it sure is a preference. We don’t want a CFO at his/her first rodeo. Going back to it, the more we can mitigate risk in any hire, the better for the PE. If someone hits on all the other criteria but simply hasn’t worked for a PE-backed company before, we will still include them. And if someone misses on some criteria and hits on this one, we will still include them, assuming the PEs they have worked for are reputable. If they’ve taken a company through an exit before as well, that only adds credence to their candidacy. PEs love CFOs who understand what is entailed in an exit and can start planning for it day one since an exit is imminent.
  11. Leadership and Team Building – A final parameter, which just as easily could be first on this list, is the ability of a CFO to lead people and build a high-performance team in a very short period of time. Often they need to clean house, or move people into the right roles, they cannot be afraid of letting people go. Giving folks a chance to get up to speed is nice, but the timeline in PE is compressed, so there is not a lot of room for coddling. It’s up or out, and fast. Once the right people are in the right seats, getting the team to perform as one takes a certain breed. We only want people of that breed. Talent and the underpinnings of talent are what make or break every single private equity investment. There is no room for error, especially in the CFO and his/her team.        

There you have it. What makes a great CFO in a PE-backed environment. In the thousands (millions?) of applications we have reviewed and interviews we have conducted over the years, we can count on two hands the number of people 100% qualified by this list. If you have most but not all of these characteristics, you still might make a great PE CFO. But this is the ideal and what we typically strive to find. It is an elite club, and when we get it right, the dividends it pays are evident in the multiple at exit.

Hilary Adorno