How can a private equity firm enhance its return on investment when acquiring a portfolio company? In situations where the acquired company may not have a CFO or the management team is replaced, using a project-based CFO can produce short- and long-term benefits.
When a PE firm utilizes a project-based CFO, they receive financial and operational support, improved transparency and alignment with a strategic partner. The following are four benefits a PE firm receives when working with a project-based CFO.
1. Improvement in EBITDA
One of the most important operating metrics a PE firm looks for is improvement in EBITDA, which is an indicator the portfolio company is generating internal cash flow. The project-based CFO positively influences this by effectively guiding and communicating with the portfolio company’s leadership team about the connection between margins, working capital, cash flow to sales and net income. Metrics are defined and measured, as are key drivers of the business that create value-added processes and procedures resulting in operating efficiencies.
2. Minimize Integration Pain
If an acquired company has weak financial, administrative and operational management, the integration pain and cost to clean up inefficiencies can be substantial. An experienced CFO can immediately identify areas of weakness, develop a plan to turn them into strengths and can hit the ground running on day one. Their unique skills in financial as well as operational management provide them the insights needed to quickly implement improvements across the entire organization.
3. Reporting Enhancements
Timely and accurate reporting of results is critical for both the PE firm and internal management. Creating dashboards for internal use and to follow up on trends that deviate from plan will keep the portfolio company on track to meet the pro forma results that were part of the acquisition process. The PE firm will need a resource that can develop a reporting structure to satisfy their requirements, which are often different than reporting to a board of directors. Creating the proper reporting structure will instill faith that the management team has a grasp of its financial structure and is able to effectively manage changes in the marketplace.
4. Stability and Flexibility
Many times the CFO of an acquired company leaves on their own or is terminated by the PE firm. A project-based CFO can immediately work on an interim basis and stabilize the situation, identify the skill sets needed and participate in the hiring of the next full-time CFO. They can also stay on once the new CFO is hired to assist in the transition. In situations where a CFO was not present in the acquired company, the project-based CFO can upgrade the financial functions in place and begin to analyze and enhance infrastructure while the permanent CFO is identified and hired. Finally, in situations where the experience level of the acquired company’s CFO is lacking, a project-based CFO can mentor that CFO and bring him or her up to the level required by the new PE owner.
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