How Can a CFO Add Value in a PE-Backed Exit Process?

The CFO role has evolved greatly in recent decades, and perhaps even more so within private equity-backed companies. Tom Pierce, managing director of the CFO advisory services arm of Consero Global, and Jason Adams, principal at BV Investment Partners, an investor in Consero, join the podcast to share their unique perspectives on how the role has shifted and how CFOs and PE teams can best collaborate to drive value throughout the exit process.

This episode is brought to you by Consero Global, a leading FaaS (Finance as a Service) provider. This is part two in a three-part series about exit preparedness. Read a transcript of the podcast below. (This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.)

Middle Market Growth: Welcome to the Middle Market Growth Conversations podcast, I’m Katie Maloney. Today I’m talking with Tom Pierce, managing director at Consero Global, and Jason Adams, principal at BV Investment Partners. They’re joining me to discuss how a CFO can add value throughout a PE-backed exit process, even as the CFO role itself evolves. This is the second installment in a three-part conversation about exit readiness. Jason, welcome to the podcast and Tom, welcome back. Let’s start with a look at how the CFO role has changed over the years. Tom, from your vantage point as someone who spent years in that seat and works closely with CFOs today, what are some of the most significant changes to that role that you’ve seen?

Tom Pierce: I think it’s safe to say, and I think all the listeners listening today would be in dramatic agreement, the role of the CFO has changed meaningfully in the past 10, 15, 20 years. I think a couple of major, almost tectonic changes—first and foremost, digital transformation and cloud-based financials have fundamentally altered the native capability of a finance department, especially within a mid-market PE-backed company. Some of the most common names we all know and love include NetSuite, Workday and of course Intacct. These have simply revolutionized financial processes, improved efficiency, scalability, transparency, visibility, real-time access to data. But look, 20 years ago, data was available, not saying it wasn’t, full stop. But to answer questions from the board or the CEO or in looking at prepping a budget, the finance team often had to go spelunking or exploring to pull up data in order to bring information and a final answer. Now, not even data, but information is available in real-time on dashboards. So native capabilities within a finance function and the on-tap analytical power and date and visibility and operations and financials have amplified many times over. This is not dissimilar to what happened in the Industrial Revolution starting back in 1794 that went on for 100 years, but this has been measured in a matter of years, not decades. The other major factor that I think about has been the rise of private equity, and there are numerous data sources that cite somewhat different assets under management for PE, but maybe 20 years ago, between $300 million and $500 million were assets under management in the mid-market for private equity in the United States. Similarly, some say it’s grown 300% or 5x or 6x. So to bring this back to your question [about] significant change in the role of the CFO, the base nature of the ownership of the companies that CFOs lead have shifted dramatically towards greater private equity ownership of the businesses. And I think it’s a safe statement to say that private equity firms are more financially driven and metrics-oriented. And as the CFO oversees all financial data and reporting as well as much the financial leadership, demands for time-accurate, insightful information falls square on the shoulders of the CFO and his financial function. That’s fundamentally altered the nature of what it means to be a CFO today.

MMG: Thanks for that, Tom. And Jason, is there anything that you would add here from the private equity standpoint about the changing role of the CFO?

Jason Adams: Yeah, Katie, so if you take a step back, private equity over the past set of decades has basically gotten more and more competitive over time. With that, even in recent years, valuations have continued to increase. And even in choppier economic environments, valuations have still been quite high for private equity deals. And so what that means is private equity funds have had to figure out how to generate returns besides buying low and selling high. And that has meant looking to CFOs of their portfolio companies to drive EBITDA growth. And of course, private equity funds look across the business, right, the entire management team, but the CFO is really in the driver’s seat of helping to drive value in EBITDA growth. And so from, from my perspective, as a private equity investor, that’s, you know, that’s been I think a big change over the years.

Private equity funds have had to figure out how to generate returns besides buying low and selling high. And that has meant looking to CFOs of their portfolio companies to drive EBITDA growth.

Jason Adams

BV Investment Partners

Secondly, I’d say add-on acquisitions have become more and more popular over the years, and another way to drive that EBITDA growth that I mentioned. And so with a higher volume of add-ons means just more dependence on the CFO in a private equity-backed situation, both to certainly help find and execute the deals in conjunction with the private equity fund, but also to integrate those businesses. And that creates a lot of value over the hold period. So that has meant a lot more effort and focus from the CFO as well. And then, also, I think what’s changed is, you know, we rely on our CFOs quite a bit to drive exit value for us as part of the sale process, and they can do that in a bunch of ways. Those are the biggest changes that I’ve seen.

MMG: And on that point, Jason, of driving exit value, I wondered if you could talk more about how you’ve seen the CFO position evolve, especially when it comes to that role in preparing for an exit.

JA: Yeah, the most obvious one is just an exit process is difficult. It’s long, it’s intense and it requires a lot of gathering of information and data and also meeting with potentially a lot of buyers. And the CFO has become more and more important in that process, certainly for gathering the data and information without a doubt, but presenting to potential buyers, communicating with potential buyers, explaining the business, the trends, the KPIs, that’s all really vital. And I think from a private equity buyer perspective, when you come into a process and you’re looking at acquiring a business and the CFO is able to speak fluently and in-depth about the business, it gives buyers potential comfort that they’re buying a high-quality business with talented individuals, especially in the CFO seat. So that has become, I think, very important. And then another point: CFOs can add value in an exit process far in advance of the actual exit itself. And part of that is building customer databases, building strong financial reporting packages that are clear, simple, but also detailed enough for what the business needs. You do that far in advance of when the private equity sponsor is looking to sell the company. That’s a really important process. And I say most of our portfolio companies, for example, we’re thinking about that years in advance, and I think that really adds value at the exit versus trying to pull all that information together in a clear way a month before you start talking to buyers.

MMG: Great. And Tom, I would love to hear your perspective here too. Do you have any other thoughts you can share here on how the CFO role has evolved in terms of their role in an exit?

TP: Thanks, Katie. I think Jason and I see the world very similarly here. I’ll touch on a slightly different point, but it definitely harmonizes what Jason mentioned there. You could say 20 years ago, you know, a CFO typically had a CPA more about being clean financials, a reporter of facts. To build on Jason’s point there, which I agree with, CFOs are now freed up to really be stewards of value and to really partner with the CEO, not just to run, drive the financial function and make sure the accounting is clean, the close is on time, et cetera. But really to actually partner with the CEO and being creators of value and ultimately, you know, benefiting the company and maximizing value in the sale process.

MMG: And one thing we talked about in our last podcast conversation, Tom, was how CFOs, they tend to have a pretty full plate already just with managing the day-to-day responsibilities of running a finance team. So I’m curious how you’d respond to a CFO who maybe doesn’t feel they have the bandwidth to start planning for an exit that realistically could be years away.

TP: And Katie, you’re absolutely correct there. I mean, the CFO absolutely has a full plate of day-to-day responsibilities in their role. Overseeing financial reporting, showing that KPIs not only correct, but that they remain relevant over time, identifying and guarding against risk. We don’t even know what the future holds, but even getting a cyber insurance policy isn’t even a given today, usually that falls to the CFO. Recruiting, training, retaining your staff and in times like these capital markets that are very much in flux and ensuring your cap structures not only tuned but optimized. As we know, we do all of these things to measure, then maximize the value of the enterprise, which we oversee as a chief financial officer. But ultimately, all or materially all PE-backed companies will undergo a sale process. At the risk of stating the obvious, the reason that someone like say, Jason at BV, acquires a portfolio company is to enhance value and then monetize that value increase through an exit event, which essentially all cases is a sale process to another acquirer. So for CFOs to say they don’t have time to think about enterprise valuation, valuation trends and exit process preparation, and in thinking about the critical assets foundational sale process, every CFO needs to begin with the end in mind. A sale process is not a nebulous possibility, but almost a guaranteed certainty. And that’s where the rubber meets the road, where the chips are cashed in. So those CFOs are caught up in a day-to-day urgency of overseeing closed process, analyze the appropriateness of an accrual, or you name it, if your department is under-resourced or you simply can’t find the bandwidth to devote to overseeing your most important responsibility, which is maximizing valuation of the firm over time, or to think about a resourcing plan or outsourcing some financial functions, whatever it takes to ensure they will be ready when an exit process does materialize. And it’s also relevant that the fact that independent studies have revealed that between one half and two thirds of rapidly growing companies will be on the receiving end of an inbound offer to be acquired from an active sale process. So be ready.

MMG: Jason, anything you’d add there as far as a CFO who’s feeling bogged down in the day to day and like they can’t take on the work required to prepare for an eventual exit?

JA: Yeah, we hear this a lot and at BV, I think we have 31 portfolio companies today. It’s a common theme within our portfolio. I mean, our CFOs are incredibly busy, and part of that is because there’s a huge national shortage of accounting and finance professionals. And so a lot of our CFOs are doing tasks that often could be done by someone else on their team, but they’re just unable to hire those folks. And so we encourage our CFOs to outsource, outsource every function that you feel comfortable with or you’re able to, whether that’s basic bookkeeping support or FP&A and technology providers, you know, we really encourage that. You know, Tom is from Consero; Consero is a really good example of a solution for overburdened CFOs, but it’s something that I think can help relieve CFO stress and save them some time to really focus on that exit planning.

And I agree with what Tom said too, right? Like CFOs can’t wait, push everything off until, you know, an exit is right around the corner, especially because in a growing trend, I think, just potential buyers are approaching potential targets far earlier and generating relationships earlier on. And so some of these sale processes now are far more organic; sellers are having conversations on a one-off basis. Private equity funds are having conversations on a one-off basis. And so, you know, that sale process could really happen even if you’re planning for it to happen in five years, it could happen at any time. So it just increases the need for at least some continual preparation over a number of years and over the whole period. And the last thing I’d say too is I think CFOs, and we encourage our CFOs to be comfortable spending money on additional team members and hiring additional folks. And I think, again, going back to that national shortage I mentioned, it’s tough. And so some of those individuals might cost significantly more than they did in the past. And I encourage our CFOs to think about those hires as investments. Think about them as, think about the ROIC on those, um, some of that support and, you know, rather than just simply a call center or incremental costs that aren’t paying immediate dividends because certainly they will in the long term.

MMG: And Tom, Jason just hit on a couple of things that CFOs can do in preparing for an exit, but I’d love to hear from you about, you know, when you’re advising a CFO on exit preparation, what are a few actionable steps that they can take right away?

TP: Yeah, and that was so well said, Jason. Just I guess to build on that then, number one, sit down with your CEO and have the conversation about an exit event and talk about what’s entailed. This is not some, again, not some nebulous event in the future, but almost a given certainty is going to happen. Two, establish just some presumed date for kickoff of a sale process or other exit event, doesn’t matter if it’s four months or four years in the future. Establishing a definitive date for your company to be ready and to undertake a sale process or, what’s equally likely, respond to an inbound offer allows you to work backwards and take care of those critical and non-negotiable needs in a sale process. And finally, three, work backwards and start building a plan that prioritizes addressing the key items necessary in exit plan.

I mean, every company is different. Not every company has a recurring revenue file or maybe they’re more episodic, but they’ll have different strengths and vulnerabilities and needs in a sale process. Some of the obvious ones might be, you know, gathering and organizing all your contracts in one place, and especially your customer sales agreements. And this is basic hygiene, but in the flurry of day to day often fall by the wayside has been my observation and a small number of companies actually have it all in one place. Schedule a time to undertake and prepare a sell-side quality of earnings for your own analysis, making sure that your numbers are clean and auditable. And it could be a varying size, but we know there might be actually some, you know, under-recognized revenue or some earnings or efficiencies that are out there that no seller is going to bring to your attention. And just basic things as build a data room index and start collecting items, you know, along those lines as well that are going to be necessary. You just make it part of how you operate your business day to day.

Not every company has a recurring revenue file or maybe they’re more episodic, but they’ll have different strengths and vulnerabilities and needs in a sale process.

Tom Pierce

Consero Global

MMG: And with your private equity hat on, Jason, is there anything that you would add or change to that list that Tom just outlined?

JA: Yeah, I agree with everything that Tom said. Two other items: One, we encourage all of our CFOs, as Tom mentioned, I mentioned before, start building a really good financial reporting package early on in the whole period. Don’t wait too long because ultimately that is preparation for an exit. And I think second is different private equity funds have different approaches on this, but we encourage our companies to have conversations with the investment banking community relatively early on. And a lot of those conversations will be in conjunction with the CEO and other management team members. But part of those conversations can help inform the CFOs just about what an exit process is going to look like in real, specific terms. And those processes change, like processes look different six months ago than they do today, but, you know, meeting with some of these investment bankers, CFOs should ask them, how long will the process take? What are the steps required? What’s the preparation needed? What kind of work needs to be done? How many of my team members need to be included? So having those convos, it’s a really good first step and that way you can prepare whatever’s necessary based on, you know, how exit processes are going in the current day.

MMG: And Jason, when you think back on some of the really great CFOs and other leaders that you’ve worked with at portfolio companies that you’ve exited, are there any examples of what they did particularly well or any best practices that come to mind?

JA: Yeah, I think, as I mentioned before, being able to explain the trends in the business and the key drivers is vital. And the best CFOs that I’ve worked with hone that skill over our hold period and monthly financials are a really good opportunity to continue to explain what’s going on in the business and, you know, present that to the private equity fund. And so the best CFOs I’ve worked with have actually done really fulsome MD&A write-ups or even very brief write-ups as well, but just to hit home at the core drivers of the business that allow them to both be in the numbers, like what exactly is going on, and also take a step back like what are the broader trends that we are seeing, how is that consistent with the past months and what do we expect to happen going forward? So practicing that really on a monthly basis when the monthly financials come out and communicating with the private equity fund is a good way to consistently hone that skill and it’ll get you ready for an exit. That’s a huge one. And the second point I’d make: The best CFOs, and this is, you know, a business comment as much as it is a way to, you know, perform well in an exit process and drive value there, but having not a list of 20 KPIs that you speak to that’s confusing, you just get lost. I think the best CFOs I’ve worked with know the 1, 2, 3, 4 key value drivers and track them very consistently over time. Communicating those handful of things, prioritizing those handful of key value drivers is I think something the best CFOs I’ve worked with have done quite well.

MMG: And I’ll put a similar question to you, Tom. You know, when you think about the private equity firms that you’ve worked in the past as a CFO, do you have any advice or best practices to share with them on how they can put their CFO in the best position to successfully execute an exit?

TP: Great question to wrap up with, Katie, and really just was about to pile on what Jason said right there, but to answer your question, it’s a really important one as well, is I think first it’s about communication. Set out your true priorities, what you really care about with your CFO and communicate it clearly in conversations. There might be exceptions to this, but I think that the true north star, the guiding principle is to maximize value over the long term at the exit process for the business. It’s easy to pull down into the noise of the day-to-day, small items but yet are urgent and acute, but keep your priorities focused and finally identify and prioritize those critical items. It’s going to be foundational on the exit process and get, you know, very confident, partner with your CFO to ensure these are getting the proper attention and prioritization.

We touched this a little bit earlier, but a sell-side quality of earnings. Your churn, customer churn, are you capturing drivers for that? Auditable recurring revenue files, forward-looking projections that really align with actual historical results looking backwards and the CFOs and the audience today as well as the CEOs and board members, think about resourcing. And if you find that critical and strategic needs like exit readiness are falling by wayside due to whatever reason, resourcing, not having the right competency on your team, or maybe it’s too lean: Think about how you can address that gap, whether it be, you know, outsourcing or greater investment in finance and accounting, hiring the right team members or making a case for greater investment into the overall function. Really, that’s really it.

MMG: Wonderful. Well, thank you so much to both of you for joining me on the podcast. These were great insights and I really appreciate you taking the time.

TP: Thanks for having us, Katie.

JA: Yeah, thank you, Katie.

The Middle Market Growth Conversations podcast is produced by the Association for Corporate Growth. To hear more interviews with middle-market influencers, subscribe to the Middle Market Growth Conversations podcast on Apple Podcasts, Spotify and Soundcloud.