How To Ace Your Most Important Hire
Adding talent to your team is one of the most exciting parts of running a business. In a typical private equity-backed transaction, you should expect to hire a new Chief Financial Officer (CFO) within six months of raising capital. Here’s why:
- Independent Reporting Your investors will view the CFO as an independent resource, reporting information to them and the company’s board. This can be the most challenging thing for a CEO to accept. It will first become evident in the CFO hiring process, as your investors will expect that they will get to decide who the CFO will be. Do your best to influence that process to find someone you can work with and build trust with, because the investors are going to want their own trusted resource in this role.
- Data Management Your investors want information. And they want that information reported consistently in a format that helps them monitor their investment and indirectly manage the company.
Two types of data are most important:
- Financial metrics, which show how your firm is making money
- Operational metrics, which measure efficiency and how effectively the company is being run
Your CFO will need to generate and live by those numbers, probably reporting more frequently than your controller has done historically. Your job as CEO is to drive and grow the numbers, but that isn’t the same as measuring them.
- New Information Systems Investors have bought into your company. At some point, they’re going to need to sell it to get their capital back. Most private equity investors will want to upgrade your information systems to show the next investor how the company has improved financially and operationally over time. They also want the new buyer to see that this work has been done and has been paid for. Hiring a CFO who has managed the implementation of a new information system will help immensely, allowing you to focus on running the business.
- Better Debt Your investors monitor the debt markets, looking for opportunities to improve the company’s balance sheet and extract cash even before a sale. They will likely restructure your company’s debt more frequently than you ever have, potentially considering a dividend recapitalization at some point. Your CFO will need to build and understand cash flow models to determine the potential benefits of various scenarios to the company and its investors. The CFO will also help you better understand the decisions you will have to make. The CFO will be the key communicator with your investors and bankers on these opportunities.
- Managing in a Leveraged Environment Your company likely will be more leveraged after a private equity transaction than before. You will have more financial covenants to monitor and a greater focus on liquidity. You will need a CFO in the room with you on a variety of major decisions: Will a new marketing campaign change your cash position too much? Can you accelerate inventory purchases this month in expectation of next month’s growth? What expense cuts make the most sense? Is there a way to delay cash outflows and speed up inflows? Your CFO will model those options, and their impacts, for you.
The best CFOs are solid on accounting, have a nose for expense control, and are expert in finance. They understand how companies generate cash and how to turn cash flows into financing for your firm. The better candidates will bring experience working in a private equity environment, will understand how private equity investors think, and be comfortable with the stresses of reporting to a board and to you. Make this hire carefully.
Based in New York, ED POWERS is a managing director and head of the Capital Access Funds team at Bank of America Merrill Lynch. Capital Access Funds is an experienced, returns-driven private equity fund-of-funds.
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