The Interim CFO and Private Equity

“The availability of interim managers has been invaluable to me. Interims have been particularly useful in turnaround situations, where skills are required to introduce changes the incumbent team are unable or unwilling to implement.” – Keith Jordan, chairman, various private equity investments, including Bank of Scotland and Murray Johnstone.

What are the ideal qualities of a successful interim CFO? Substantial change and transition implementation experience and the personal attributes to make it happen are essential. Without strong interpersonal and communication skills, gravitas and team leadership capabilities, interim CFO’s are unlikely to succeed, however strong their technical background might be. The demonstration of these qualities is paramount, especially when an interim is parachuted into a crisis situation requiring a fast turnaround.

Interim Finance executives will have a track record of at least five to ten years at or near board level within companies with 20m to 2bn GBP turnover. They will have held a senior management position and/or have been a head of function.

In today’s economic cycle the interim CFO must immediately consider whether the investment has sufficient resources to withstand a downturn. Alternatively, can it withstand a serious competitive attack and respond by funding alternative investments to ensure survival and growth.

Key issues requiring immediate impact from an interim CFO in private equity investments include:

– turnarounds;
– de-risking and debt pay down;
– banking relationships and managing covenants;
– cash management;
– poor internal controls;
– build foundations for growth or market downturn;
– restructurings, downsizing and cost management;
– acquisition integration;
– mergers;
– Board conflict and acceptance;
– preparation for sale, liquidity event or transaction

Personal attributes for success of an interim CFO include:

– indications of a high achiever (someone who is proactive, results-orientated, positive, prefers a hands-on approach and makes things happen);
– politically sensitive without being drawn into the politics;
-understands the need to stay objective and will not go “native,” particularly on an extended assignment. A private-equity firm will require the interim CFO to remain a strong link between them and the investment;
-someone who can stick their neck out and say it how it is, using fine judgement;
-not concerned with personal status and can take that necessary step down in responsibility level easily and willingly;
-ability to operate at different levels and to demonstrate flexibility is essential in a change situation, where the goal posts can move from the day one steps into the assignment. Equally important is the need to adapt quickly to different cultures, sectors and organisations;
-ability to establish immediate credibility – particularly important as the sponsoring client may have made a brave move in introducing the first interim executive into the organisation at or near board level;
-the interim will take the team with them very quickly, establish themselves with their peer group and generally sell the concept of why they are there on arrival;
-exceptional interpersonal skills and positive attitude should be immediately apparent and their “over-qualification,” combined with a touch of humility, ensures quick integration. – financial security and fulfilled permanent career ambitions are also key requirements. The new interim executive is, in effect, undertaking a business start-up with all the associated risks. If financial security is lacking, the executive will have his or her eye on the permanent job market and will be an unsuitable candidate for true interim executive roles.

Financial Turnaround

The use of interim managers in private-equity investments has become an increasingly common method for turning around enterprises or pushing through key changes in specific business areas. The interim CFO has the personal and professional impact and experience to enable the rapid results sought by private-equity firms.

De-Risking & Debt Pay Down

The interim CFO will focus on de-risking the business and pay down of debt where possible. Areas of action include working capital and how better to manage it, tightening receivables and lengthening payables. A large amount of debt simply focuses the mind of an experienced interim CFO on cash. They will instinctively understand that the investment is on a three to five-year trail, and will have been proven in managing the seemingly opposing demands of defensively repaying debt, as well as a focus on value growth.

Cost Management

CFO’s in private-equity backed businesses will not be programmed to be emotionally attached to any aspect of the cost base. Each asset and each line in the P&L is will be reviewed against return and efficiency. Negotiation of supplier contracts is a key influence on cost base. The negotiation skills and commercial resilience of an experienced interim CFO will drive supplier to a better financial deal – and feed directly to the bottom line.

Poor Internal Controls

A CFO should be able to produce a comprehensive list of internal control shortcomings and the risks to which they could expose the investment. It is important the interim ensures the material weaknesses are actually highlighted and dealt with.

Cash Management

Cash can often provide one of the earliest indicators of when things are going wrong. Knowing what your daily cash resources are, and how they are due to change in the coming eight to 12 weeks, is a core discipline. Unexpected cash outflows are regularly a warning that something is wrong. The interim CFO will offer experienced insight and natural instinct for cash management.

Board Conflict and Acceptance

Boards can be dominated by one individual, or several directors can be competing for the top job. The need for an open and honest culture around the board table, and for the appropriate degree of challenge to plans and performance, is important for boards to succeed. The brief case study below provides an example of where an interim CFO has played an influential role with a hostile CEO, whilst protecting the private-equity investment.

An Interim CFO in a Private Equity Investment – A Brief Case Study

The private equity firm had just bought out a European medical devices company with manufacturing operations in Germany and the Americas, with 14 international sales subsidiaries. There was a hostile CEO in place and no senior Finance executive in place. The CEO was inherited and was going to resist change. Neither was he keeping financial discipline, allowing costs to spiral. It was decided that an immediate solution was needed; someone able to hit the ground at speed that was fluent in German and could get a rapid understanding of costs. An interim CFO was brought in.

The interim CFO’s task was to look at the financial structure of the company and understand the data and management information, get a grip on the cash positions and forecast. It was also to work with the CEO and contain his excesses.

The CEO didn’t want anyone else involved in running the business. The interim CFO was therefore ‘forced’ upon him. The interim played it very well – his interpersonal skills enabled him to insert himself as interim CFO whilst not appearing to threaten the CEO. The CEO did his best to frustrate, keeping the private equity firm out of the loop – for example, he signed off on capital expenditure without advising them. As a result the interim CFO had to confront the CEO on this and many issues – it was unpleasant but it was dealt with in a no nonsense and nonthreatening way.

Key outputs included reports and accounts made sense, as did the cash forecasting. In a situation of significant turmoil and spiraling cost and an erratic CEO, the interim CFO steadied the ship.

In summary, the interim had to work by persuasion rather than having the backing of the CEO. He worked out very well under these circumstances, proving very able to draw in all the information and influence through making the right suggestions and decisions.