Private Equity Firms,

It’s time to tap the power of benchmarking the F&A spend of portfolio companies

For Private Equity Sponsors, harnessing portfolio company F&A org benchmarking data can be a valuable tool in driving value creation and action. .

Private equity sponsors have a new value creation tool at their disposal: benchmarking the Finance & Accounting (F&A) spend at each portfolio company against peers to bring each in line with best in class industry standards

Finance & Accounting FaaS

Many PE sponsors are now employing an army of operating partners on hand to parachute into portfolio companies, drive value creation and transform companies to achieve the investment thesis. The Finance & Accounting Org. has often been a difficult area to assess for value creation initiatives absent benchmarking as to how one company of a size and industry attributes stacks up against peers.

Consero, a pacesetter in Finance as a Service (FaaS), takes a deep look at F&A for our clients offering troves of benchmarking data to assess where each company stacks up. To date, there was no good way for measuring the spend at companies, holistically across people, processes, and systems despite the fact that every other department has an efficiency metric And most private equity firms don’t know the true cost of the F&A function, leaving it up to the CFO to play judge and jury. And there isn’t a CFO in the world that doesn’t run a “tight ship.”

The Real Cost of F&A

Consero created a database of the F&A budgets of over 1,000 middle market companies in the SaaS, technology, and service-based industries. The benchmarking data is based on assessments of the current and former client base. The total F&A cost is calculated by adding the cost of personnel to the cost of tech and is then reported as a percentage of the company’s total revenue.

The results for one PE sponsors (middle market tech growth) are represented in the figure below.

ABC PE Firm’ s Portfolio - F&A as a % of Revenue

The F&A spend for each portfolio company is shown as dot arranged by percentage of revenue, which is found on the left side of the chart. At the bottom of the chart are revenue bands, which highlights the PE firm’s preference for companies in the $10-20 million range, with a few in the $25-50 million category.

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The Benchmark

What Consero found was that for their top 50% clients, represented by the orange line, the F&A spend is around 2% for a company with $10-24 million in revenues, with that line dropping even lower as revenues increase past that range. The blue line represents all companies, even those with large in-house staffs, which hovers around 3%.

The two green dots are the portfolio companies that the private equity firm tapped Consero to service with its FaaS model. Portco #17 has been fully optimized by Consero, while Portco # 21 still has four in-house staffers in addition Consero’s solution. As a result, Consero will be assuming more work and reducing staff for the latter to keep driving the F&A cost down.

In their research, Consero found that the portfolio companies with the highest F&A spend, such as Portcos #3, #4 and #5 often had late and inaccurate financials. So, these portfolio companies were paying a premium for a solution that couldn’t even deliver the basic requirements expected out of an F&A organization. Consero’s FaaS approach wasn’t merely driving down costs, but materially improving the quality of the full F&A function.

The $100 Million Find

In the next figure, we see what would happen if Consero were to support the F&A function at 15 of the private equity firm’s portfolio companies and pulled the spend inline with its top 50% of clients. As they were all software companies, Consero assumed a 15x EBITDA multiple for all of them:

ABC PE Firm’s Portfolio – Missed Savings

Client Name Annual Revenue Current F&A % of Revenue Optimized F&A% of Revenue Delta Gained or Lost EBITDA Potential Valuation Implication (@15X EBITDA)
1  $ 15,000,000 7.33% 1.83% -5.50%  $ (825,500)  $ (12,382,500)
25  $ 51,000,000 2.16% 0.72% -1.44%  $ (732,800)  $ (10,992,000)
18  $ 35,000,000 3.10% 1.09% -2.01%  $ (703,500)  $ (10,552,500)
19  $ 40,000,000 2.75% 1.09% -1.66%  $ (664,000)  $ (9,960,000)
4  $ 11,000,000 5.45% 3.86% -1.59%  $ (175,000)  $ (2,625,000)
20  $ 33,000,000 2.64% 1.09% -1.55%  $ (510,300)  $ (7,654,500)
8  $ 22,000,000 4.09% 1.83% -2.26%  $ (497,400)  $ (7,461,000)
10  $ 23,000,000 3.70% 1.83% -1.87%  $ (429,100)  $ (6,436,500)
7  $ 17,000,000 4.29% 1.83% -2.46%  $ (417,900)  $ (6,268,500)
5  $ 11,000,000 5.45% 1.83% -3.62%  $ (398,700)  $ (5,980,500)
22  $ 28,000,000 2.48% 1.09% -1.39%  $ (388,036)  $ (5,820,540)
9  $ 15,000,000 4.04% 1.83% -2.21%  $ (332,108)  $ (4,981,619)
24  $ 42,000,000 1.79% 1.09% -0.70%  $ (292,200)  $ (4,383,000)
6  $ 10,000,000 4.50% 1.83% -2.67%  $ (267,000)  $ (4,005,000)
11  $ 13,000,000 3.65% 1.83% -1.82%  $ (237,100)  $ (3,556,500)

Define the Standard, Not the Solution

This begs the question of how private equity firms can apply this data to their own portfolios, especially as many operating partners can struggle to convince portco executives to change course on a given business practice, especially when those practices are long-standing. There’s a natural pushback as private equity firms are seen as investors and a given management team is seen as the operators, who know their business best.

One tactic that can be effective is if private equity firms share the benchmarking data so that a given Company learns how much their peers spend. That tight ship doesn’t seem as tight if it’s spending 4% of their revenue on F&A, while the standard hovers around 1 or 2%.

The next step is for the PE team to ask the Company in question to lower their spend to that standard, without dictating how they do it. A key part of that request is a deadline. Taking three years to lower F&A costs is hardly the pace that feeds record-breaking IRRs.

Faced with a task, and a deadline, the portco team might be far more interested in considering a FaaS provider like Consero, given its track record and reputation. So, with the right dose of data and diplomacy, cutting F&A spend can leave a company stronger than before, and help contribute to the
value creation that made private equity the powerhouse asset class it is today.

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Thur, Aug 25th, 2022

Consero FaaS: Disrupting the Outdated Traditional F&A Model

Transformation
  • Cash to GAAP conversion
  • Clean-up work
  • Interim oversight & support
  • Accounting software Implementation

Build it Yourself Solution

  • CFO / Interim CFO
  • Consultants / VARs

Consero FaaS Solution

  • CFO / Interim CFO
  • or Consero Interim CFO
  • Consero Setup/Transformation
Ongoing F&A
  • Monthly financials
  • Daily accounting support
  • Management reporting
  • Integrate add-on acquisitions

Build it Yourself Solution

  • CFO
  • Controllers & Accounting Team
  • Enterprise Accounting Applications

Consero FaaS Solution

  • CFO
  • or Consero Fractional CFO
  • Consero FaaS Enterprise F&A Software and Services

New PE Platform Investment F&A Challenges

Founder Owned Company Accounting:
  • Existing accounting done on a cash/hybrid basis
  • Run on SMB accounting software and other disparate applications
  • Inability to produce auditable financials
  • Lack of know-how to develop projections & KPIs
  • No consistency/structure to customer contracts
  • Underqualified staff
  • Non-scalable manual processes
Carve-Out Accounting:
  • Required to move off parent company accounting applications in a timely fashion
  • Have to build an entire F&A team
  • No documented operational policies and procedures
To Optimized Finance & Accounting:
  • Monthly financials available in 5-10 business days
  • Audit and diligence ready support details
  • Integrated enterprise grade accounting software
  • Budget and forecast reporting
  • Business KPIs
  • Efficient & scalable processes for rolling in add-ons