Seven tips for interim CFO’s of PEG portfolio companies; part 3 of 7 – Understand the exit strategy

This is part three of a seven-part series of tips for interim CFO’s at companies in the portfolio’s of private equity groups.  These tips are intended for financial professionals who already have the skills and experience to be a successful CFO at a typical mid-market company.  They specifically address the differences between being a CFO at a typical mid-market company and being an interim CFO at a growth-oriented mid-market company in the portfolio of private equity group.

Tip #1:  Be an ambassador

Tip #2:  Be the advance team

Tip #3:  Understand the exit strategy

Most companies make money on the bottom line.  As CFO’s, that is ordinarily our obsession.  PEG’s primarily make money by buying and selling companies. Obviously, improving the bottom line is one way to boost the value of the company, but it is not the only way.  The strategy should always be in the long-term interest of the company, but also in the short-to-mid-term interest of the shareholders.  Building the company in a way that will fetch the highest price at exit sometimes leads to a different strategy than a company might take if it is solely concerned with the bottom line.

For example, adding new customers may in some cases reduce your gross margin percentage and do little for your bottom line, but it will diversify your customer base (reducing risk) and might increase your top line enough to “move the needle” for prospective strategic buyers.  Another example is a particularly risky product line that is currently profitable may discourage prospective buyers when trying to sell the company, or distract the focus from the product lines that are the most marketable to potential strategic buyers.

As the interim CFO, make sure you understand the exit strategy and any related confidentiality issues.  Help other key employees understand this so they do not get frustrated when they see decisions being made that do not seem to contribute to the bottom line.