By Heather Johnson, Managing Director, Focus Search Partners
This article, the fourth in Focus Search Partner’s ongoing CFO Insights series, highlights what to expect of a newly hired CFO in their first 100 days and ensures sponsors are hiring CFOs up to this weighty task.
Speaking of the headiness associated with a private equity acquisition, the experts at Grant Thornton have said,
“The first 100 days will ultimately determine whether the transaction evolves from promise to performance.”
The same can be said of the first 100 days of a newly hired CFO’s tenure in a sponsored environment, whether that coincides with the portfolio company’s first 100 days or comes later.
Throughout the CFO hiring process, PE firms need to set clear expectations for the CFO’s first 100 days while also evaluating a candidate’s ability to meet those expectations, or better yet, to exceed them. This is also true when hiring an interim CFO. In either situation, it’s critical to determine if the candidate’s experience and CFO profile equal the time-sensitive challenge before them.
With this three-part checklist, investment sponsors can more confidently forecast a prospective CFO’s potential 100-day performance and more easily assess a newly hired CFO’s actual 100-day performance.
Part 1: Situational Assessment
According to Grant Thornton, the optimal 100-day plan for a PE-acquired company leaves no stone unturned. A CFO’s first 100 days in a sponsored environment needs a similar game plan that includes the following:
- Understand the PE firm’s agenda
It falls to the CFO to help set—or reset if coming in after the fact—the relational tone between the PE firm and the portfolio company’s executive leadership team. Consequently, the CFO must pinpoint the sponsor’s culture, determine if it has a set playbook, and identify its desired role in supporting the executive leadership team, whether that’s limited to operational advice as an intellectual partner or a more significant role in critical decision-making around M&A or other transformational activity.
- Recognize the investment thesis
Knowing that financial reengineering only gets a portfolio company so far, the CFO has to review the PE investment thesis and compare it to the actual business issues they are uncovering. This allows the CFO to determine the best way to get the portfolio company where its executive leadership team and sponsor want it to be in the short and long term.
- Probe executive leadership’s thinking
A visional disconnect between the executive leadership team and the PE sponsor can tank even in favorable situations. It’s up to the CFO to ascertain whether the leadership team has a different view of the PE investment than the sponsor. This exercise, critical to the early days of their tenure, helps the CFO prioritize any needed consensus building that will be critical to everyone’s success.
- Address the finance organization
The CFO’s ability to achieve stated growth goals also depends on the finance organization they inherit. Immediately assessing and evaluating all financial policies, procedures, systems, and human resources allows the CFO to identify areas for improvement quickly. Then, they can design and execute a transformation that supports hockey stick growth and focuses on adding value to the company.
- Consider company dynamics
Beyond the finance organization, the CFO must consider the company’s overall culture and determine if the organization has a clear reporting structure, if roles and responsibilities are well defined, and if workstreams are integrated. If not, organizational optimization becomes a CFO priority.
Part 2: Collaboration with Key Stakeholders
The sooner incoming CFOs engage with key stakeholders and start building productive relationships, the more likely they are to achieve the stated goals for the portfolio company:
- Partner with executive leadership and the board
Listening to the input and advice from the executive leadership team and board from the outset positions the CFO to determine the company’s most appropriate financial direction and to identify the strategies that will drive earnings and revenue growth. A strong partnership also ensures the CFO optimally balances potentially competing strategic, financial, and operational priorities.
- Optimize capital structure
Lenders comprise another key stakeholder group, so the CFO needs to determine whether capital is being used appropriately to support growth. If the CFO doesn’t assess the leverage situation and identify intricacies associated with the company’s current debt load and its equity agreements, it will be difficult to successfully work with lenders and negotiate on behalf of the portfolio company.
- Focus on financials
There’s also the important relationship with cash. CFOs naturally gravitate toward financials. As they do, they need to effectively manage the company’s balance sheet, working capital, and cash flow so that they all support long-term growth.
- Partner and support M&A team
As the deal team targets acquisitions, determines valuations, structures deals, and seeks financing, they need a trustworthy partner at the finance helm. For M&A activity to deliver the desired return on equity, the CFO must help conduct the necessary financial due diligence, including assessing the quality of earnings report, working capital, and risk management.
- Drive acquisition plans
Moreover, all key stakeholders rely on the CFO to develop, execute, and integrate acquisition plans. From inception, due diligence, valuation, and negotiations to closing and integration, the CFO’s job is to ensure the deal achieves its desired results, paying particular attention to post-close EBITDA and revenue targets.
Part 3: Management and Monitoring
Throughout their first 100 days, the CFO has to own the budget, planning, and forecasting processes while also monitoring the overall business:
- Establish accountability
Defining KPIs and implementing analytics are crucial to driving operational focus and rigor. The CFO must quickly identify the business’s critical financial and operational levers and the core metrics for evaluating them to provide the sponsor with consistent numbers backed by solid accounting practices.
- Facilitate problem-solving and decision-making
By monitoring the performance of the business through both its operational and financial KPIs, the CFO can provide the leadership team, board, and PE firm with visibility into challenging business issues and identify proactive, data-driven solutions so that critical decision-making is always rooted in ROI thinking.
- Provide executive gravitas
The CFO is uniquely positioned to provide a strategic perspective. That should be visibly demonstrated in the first 100 days and combined with a keen interest in the day-to-day operational work crucial for business success.
- Interact with capital advisors
Whether it’s peer benchmarking or near-term exit strategies, the CFO has to work closely with capital advisors from day one of their tenure.
A More Successful First 100 Days Starts with the Right CFO Hire
This checklist provides PE sponsors with a solid framework for an incoming CFO’s first 100 days, but it must be coupled with an optimal CFO hire to be genuinely effective. Focus Search Partners understands the various CFO Profiles in PE-Backed Environments, and we can help you grow your executive team by sourcing the right CFO for your particular situation.
Are you looking for an interim or permanent CFO for a portfolio company? Contact Focus Search Partners today.