There are several key differences between independent companies and those in the portfolio of a Private Equity Group (PEG):
- PEG’s can provide companies in their portfolio with a team of operational experts and additional financing options that may not have been available previously;
- They make the majority of their money by buying and selling companies, rather than from the operating income of the company while it is in their control;
- They have other companies in the portfolio, which can impact their strategy;
- Unlike most founder-owners, they are not at the company every day or directly involved in every aspect of the business on a day-to-day basis;
- Unlike most founder-owners, they have done this many times before and usually have a basic playbook to follow.
Not only do these differences impact the strategy, they impact the CFO’s role in a variety of other ways. PEG’s typically want to see weekly dashboard reporting and a rolling 13 week cash flow forecast. They want detailed monthly financial reporting with comparisons to budget, prior year, KPI’s, compliance with credit agreements and covenants. They want to see profitability reporting in ways smaller companies might not such as by customer, channel, region or product line. They want a formal quarterly meeting with the board of directors or advisors. They want key team members to have financial incentives based on company performance. They want to see documented closing procedures and reconciliations and they want to implement ‘best practice’ solutions and procedures up and down the organization. Basically, all the things a company should have been doing before that may have been considered optional will quickly become mandatory.
PEG’s usually bring in an interim CFO after acquisition to bring the organization into compliance with the expectations outlined above. When they identify an interim CFO who understands what they want and is effective at implementing it, they tend to use that interim CFO again at other acquisitions to bring a sense of uniformity throughout their portfolio.