M&A Growth Considerations: Challenges with Carve-Outs and Roll-Ups

Chris Hartenstein, VP of Client Solutions, talks with us about carve-outs and roll-ups, which are two common strategies used in the corporate M&A world. Following is a closeup look at these strategies, including some of the challenges associated with each.

Carve Out: Divesting a Business Line

In a carve-out, a larger company will spin off or divest a line of business out of the existing company typically to become its own new entity.

The carve-out separates completely from the parent company and becomes its own standalone entity. As a result, new company will have to set up its own finance and accounting system so that it can provide financial statements to its new board of directors.

The new entity will typically sign a Temporary Services Agreement (or TSA) with the parent company (or seller) with a defined timeline that’s usually between four and six months. During this time, the parent company agrees to continue to provide finance, accounting and administrative support while the new entity sets up it’s own finance and accounting system.

These new spinoffs face a number of challenges that need to be solved very quickly due to the limited among of time the parent has agreed to support them. These challenges include the following:

• They must start from scratch with everything

This includes recruiting and on-boarding a completely new finance and accounting team

selecting and negotiating software agreements for a new ERP, T&E package and any other F&A software that may be needed

developing new process and procedure documents for operations, invoicing, AP, payroll and creating reporting and KPI packages

• The team that is hired probably hasn’t implemented new systems more than a few times in their career and necessitates the hiring of outside consultants to assist with software implementation

• Internal implementation will take between six months and one year, which may be longer than the TSA lasts.

• The new entity may be unable to provide basic financial reports on a timely basis.

• It can be difficult to obtain starting balances and other support (e.g., trial balances, AP and AR, and accrual and prepaid details).

Keep in mind that once the carve-out deal is closed, the seller will not place a priority on providing financial information to the new entity. It becomes “out of sight, out of mind.” Therefore, it’s usually smart to try and negotiate a holdback of some of the purchase price until the transition is complete and all of the financial information and support has been provided.

Roll-up: Acquiring and Merging Similar Businesses

In a roll-up play, a private equity firm acquires multiple small companies that offer similar types of services and have similar revenue streams and merges them together. This allows the firm tobuild economies of scale through a single brand supported by shared sales, marketing and operations to increase the value of the whole.

The acquired companies are usually smaller businesses that sometimes don’t place great value on high-level finance and accounting support. As a result, the accounting team skillsets are often lacking at the companies. There may also be turnover risk at the acquired businesses if employees don’t want to stick around after the acquisition.

Companies may face a number of challenges when performing a roll-up, including the following:

• Just like with a carve-out, companies have to start from scratch with everything.

• The staff at the acquired businesses sometimes lack high-level accounting knowledge and experience.

• Similar to a carve-out, internal implementation will usually take between six months and one year and the new entity may be unable to provide basic financial reports on a timely basis.

• The acquired small businesses typically use cash basis accounting requiring additional work to move them to accrual/GAAP accounting

Before adding a roll-up, be aware that you may need to convert from cash basis to accrual basis or GAAP accounting. Also be prepared for difficulty in obtain starting balances and other support due to the cash basis accounting. Sometimes the individual businesses and the private equity firm may not be on the same page as it relates to the structure, processes and procedures and reporting.

Both carve-outs and roll-ups will require their own implementation including:

· Software setup (e.g. Intacct, Nexonia, BILL)

· Entering prior period data, vendors and employees

· Training acquired businesses on processes and procedures

· Setting up consolidations

How Consero Can Help

Consero can help your business with a carve-out or roll-up. We have a set of best practice processes and workflows and dedicated implementation to support the transfer and setup, along with a predetermined integrated tech stack.

We can complete the implementation of a carve-out in a 30 to 90-day timeframe and a roll-up in a 30-day timeframe. This allows CFOs to focus on strategic issues and further acquisition targets. Connect with us to learn more about how Consero’s Finance as a Service solution can help your investment firm and your portfolio companies: https://conseroglobal.com/request-a-consultation/

Cost Containment Strategies During an Economic Downturn

In the current uncertain economic environment in which some economists are predicting an economic slowdown or even recession, it’s important for CFOs to carefully evaluate cost containment.

Consero recently hosted a virtual CFO Roundtable in which several CFOs discussed how they are doing this. Participating in the panel were Steve Isom, CFO of Bloomerang, a vertical SAS company; Jessica Hamilton, the CFO/COO of ActiveProspect, a marketing technology company; and David Dolmanet, the CFO of BryComm, a supplier to the commercial construction industry.

Preparing for a Downturn

In response to the question, “How can CFOs prepare for and predict the impact of a potential downturn?,” Steve Isom stated that “the era of free money is over and with it the mindset of growth at all cost. This doesn’t mean growth isn’t important, but efficient and durable growth is critical.”

Isom noted that there’s a lot of talk about softness in the market and negative signals. “I encourage CFOs to look closely at their own demand signals and understand what’s happening in their business,” he said. “For example, we manage and monitor top-of-funnel metrics daily to stay on top of what’s happening. It’s the old saying: Plan for the best but expect the worst.”

Scenario planning will be critical in 2023, said Isom. “You need to have a good handle on what happens if your business doesn’t hold up well in 2023,” he said. Isom cautioned against cutting too much. “Keep a firm handle on your own demand signals and keep an eye on macro trends.”

Balancing Growth and Investing in Operations

Jessica Hamilton was asked about how she sees the grow-at-all-cost strategy evolving and finding the right balance between growth and investing in operations. “Finding this balance is more important now than ever,” she said. “For us, it’s the balance between growing and investing capital in sales and marketing and product engineering.”

ActiveProspect has always operated with the Rule of 40 in mind, said Hamilton. The Rule of 40 is an indicator of the balance between revenue growth and profitability. It states that a company’s combined growth rate and profit margin should not exceed 40%. This helps ensure capital efficient growth and wise spending.

“When we have to cut back on some investment initiatives, we’re prepared,” Hamilton said. “We’re not cutting all the way back to hit the Rule of 40. Our plan for 2023 is Rule of 31 — we’re not comfortable making any more cuts than this.”

Lowering the Cost of Debt

In response to the question “How do you lower expenses when cost of debt is increasing each quarter?,” David Dolmanet noted that many people on his team have only experienced an economic environment in which interest rates have been at or near zero.

“In this environment you don’t have to make decisions regarding the time value of money,” he said. “Since our interest expense has more than doubled, I now manage my cash position much tighter in managing my line of credit balance. If I continue to use the line of credit while maintaining a high cash balance, we’re paying significantly more in interest than we were before.”

Dolmanet added that the company is trying to manage its line of credit and inventory more tightly and focus more on its cash cycle than it would during a grow-at-all-cost environment.

Winning the Talent and Wage Wars

Talent is one of the biggest costs companies face today and it isn’t going down anytime soon. Hamilton talked about her company’s strategy when it comes to hiring and retaining top talent.

“We decided we weren’t going to engage in the ‘wage wars’ when salaries started going up extraordinarily and lost a few employees who left for higher pay,” she said. “But we had done succession planning and had built a strong bench.”

The company took a hard look at the benefits and perks employees valued, eliminating perks they didn’t place value on and replacing them with perks they did value. “Happy hours and virtual games that were popular coming out of the pandemic were no longer valued,” she said. “What our employees do value is workplace flexibility and career development so we focus on these.” For example, the company is now 100 percent remote.

Isom said Bloomerang is focusing on high-impact employee perks. “Since we’re in the non-profit space, we gave each employee $100 to donate to the nonprofit of their choice on Giving Tuesday,” he said. “The amount of uplift we got from this really paid off for us.”

Dolmanet said that the tight labor market and rising inflation have made compensation strategies challenging. “Employees expect raises to keep pace with inflation,” he said. “We are focused on taking care of the employees who have the greatest impact on the business.” The company is also using variable compensation to grow overall compensation for more employees and recognize their contributions to the success of the company.

Outsourcing the Finance Function

In the current economic environment, some CFOs are considering outsourcing functions they might not have outsourced before, including all or part of the finance function. Isom says this depends on the specific circumstances of each company.

“One of the good things about outsourcing finance is that you can pick and choose which functions you outsource and which ones you keep in house,” he said. “For example, we kept FP&A in house and outsourced day-to-day accounting. This was a good balance for us.”

Consero Global offers outsourcing of the finance function via Finance as a Service (FaaS). To learn more about FaaS and how it can help you manage costs during an economic downturn, connect with us at https://conseroglobal.com/request-a-consultation/

 

Meeting the Digital Transformation Challenge in Today’s Challenging Economic Environment

Many CFOs and finance managers are currently facing the most challenging economic environment they’ve ever encountered. Near-record inflation is putting pressure on corporations to cut costs and some economists are predicting a recession in the upcoming year.

These challenges could make it harder for finance professionals to lead digital transformation efforts at their companies. In an environment like the one we’re in now, CFOs will have to focus on strategic decision making in order to shepherd digital transformation initiatives through their organizations.

Accelerating Digital Transformation

While the current environment certainly makes digital transformation efforts more challenging, nearly half (49%) of CFOs who responded to the most recent PwC Pulse Survey said they plan to capitalize on digital transformation initiatives, which they consider to be a high-growth opportunity that has exploded following the pandemic.

In addition, the Global CFO Survey 2022 by Everest Group found that digital transformation is moving higher up the priority lists of CFOs. Judgement-intensive investments, including financial planning and analysis (FP&A), are especially high on CFOs’ priority lists.

However, four out of 10 respondents to the KPMG 2022 CEO Outlook survey said that while digital transformation is still a priority, their organizations have currently paused their digital transformation strategies. And more than a third (36%) said they plan to pause these strategies in the next six months due to economic uncertainty and recession fears.

Acquiring the Right Technology

The first step to leading digital transformation in the current environment is to assess your company’s competitive priorities and differentiating factors. Then you can identify and acquire the right technology for your organization’s digital transformation. For many organizations, this includes FP&A, financial modeling and scenario planning tools.

If your digital transformation budget is tight due to recession or other financial challenges, consider initiating smaller projects that can demonstrate faster ROI than larger long-term initiatives like ERP and ERM projects. It can take years and long demo periods to gauge ROI on projects like these, which can make them easy targets for budgets cuts when finances get tight.

In contrast, smaller, best-of-breed digital solutions can usually demonstrate ROI much sooner. For example, an FP&A tool might cost $10,000 a year and yield positive ROI right out of the gate.

During challenging financial times, CFOs often have to work harder to cost-justify expenditures, including those for digital transformation initiatives. They can’t just make investments like these because “everybody else is doing it.” Instead, companies expect accountability when it comes to what benefits they can realize from digital transformation initiatives.

FaaS and Digital Transformation

Recessions and economic slowdowns often present opportunities for businesses to invest in digital technologies that improve current financial processes, lower costs and boost efficiency. Finance as a Service, or FaaS, is one good example.

FaaS is a modern alternative to building an in-house finance and accounting team that delivers greater financial visibility and improved operational scalability, along with a lower and more predictable cost structure. With FaaS, companies can achieve a full digital transformation by outsourcing their finance and accounting function to a third-party service provider.

In fact, finance is the second most outsourced function among corporations — nearly half (44%) of businesses say they outsource their finance function.

With FaaS, businesses enjoy scalability and cost efficiencies when compared to maintaining an in-house finance team. Studies have shown than using FaaS can lower the cost of the finance function by between 20% and 40% compared to the fully loaded costs associated with staffing an internal finance department.

The FaaS model allows companies to quickly scale up the finance function as needs arise. This results in both time and cost savings, as well as standardized reporting so companies can quickly and accurately assess the financial health of their portfolios and consistently understand financial metrics across time periods.

FaaS also allows CFOs to focus on more impactful business initiatives while reducing the cost and complexity of maintaining an in-house finance operation. Employees can reallocate their time from administrative finance functions to high-impact business development initiatives. Meanwhile, companies can reduce staffing and technology costs in the finance department, instead paying an affordable monthly fee.

FaaS from Consero Global

Consero Global offers Finance as a Service that can help you achieve your digital transformation goals. You can connect with us today at https://conseroglobal.com/request-a-consultation/ and learn more about the potential role of FaaS in your company’s digital transformation.

 

Meet the Talent Challenge with Finance as a Service (FaaS)

The worker shortage that began during the COVID-19 pandemic is starting to ease up in some industries, but it remains a challenge in accounting and finance. In a survey recently conducted by Robert Half, nearly nine out of 10 (87%) managers at U.S. companies said they are finding it increasingly difficult to find talent to fill general accounting, financial reporting and financial planning and analysis positions.

This shortage of financial and accounting talent is affecting all size companies across many different industries. Small and privately held businesses, however, are especially feeling the pinch.

Statistics Illuminate the Problem

A recent article in The Wall Street Journal pointed to more statistics illuminating the talent shortage in finance and accounting. There were 36,540 more postings for accounting and audit jobs in the U.S. in 2022 (through November 30) than there were the prior year. This was the highest number of accounting and audit job postings (177,880) since 2008.

In addition, employees started just 113,400 of these jobs (through November 30), which was down 16% from the prior year. It’s now taking 56 days on average to fill accounting and audit jobs, which is up 10 days from the prior year.

The article pointed to several possible reasons for the financial and accounting talent shortage. For starters, fewer young people today are pursuing college degrees in finance and accounting. The number of students in the U.S. who completed accounting degrees during the 2019-2020 academic year fell by 2.8% for bachelor’s degrees and 8.4% for master’s degrees compared to the prior year, according to the AICPA.

There is often a lack of awareness among young people about career opportunities in audit and accounting, noted an AICPA spokesperson. The organization is actively working to raise awareness about the profession among middle-school and high-school students. Meanwhile, demand for accounting and finance employees is expected to remain strong in the near-term future.

Outsource Finance and Accounting Using FaaS

To attract and retain accounting and finance employees, many companies are offering higher starting salaries, more frequent salary increases and faster promotion opportunities. But there’s another solution to the financial and accounting talent shortage: Outsourcing the finance and accounting function to a third-party service provider.

Sometimes referred to as Finance as a Service, or FaaS, this approach gives companies a full suite of staff, services and software that’s capable of managing the entire finance and accounting operation. This includes processing transactions and customer payments, paying vendors and producing monthly financials and more. It is very typical for a FaaS solution to lower the cost of a finance function compared the traditional “build it in-house” approach. Many customers experience a 20-40% reduction in the cost of their finance function.

In other words, FaaS is a one-stop financial and accounting services shop. The FaaS provider will have its own staff and software platform, so the customer does not have to bear the burden of staffing issues or software upgrades.

FaaS also features transparent pricing so it’s easy to forecast what costs will be as the company’s needs change in the future. A FaaS provider charges based on headcount and services offered, not by the hour or based on the level of staff assigned to the client. This way, companies know exactly what they’re paying for and how their costs will rise or fall as they scale up or down.

With FaaS, companies have access to skilled finance and accounting professionals with the right level of expertise for their specific needs. For example, sometimes businesses need a higher level of strategic expertise, like when performing acquisitions and onboarding new entities. With FaaS, businesses pay for this higher level of service only when they need it.

FaaS: A Creative Solution

Incorporating the FaaS model is one creative way middle-market corporations can meet the challenge of today’s financial and accounting talent shortage. It will also relieve finance and accounting managers of the time-consuming and expensive task of interviewing, hiring and training potential new employees and retaining them once they’re on board. This will free managers up to spend more time doing strategic, value-added work for your company.

Consero Global offers Finance as a Service for middle-market businesses across a wide range of industries. To learn more about FaaS and how it can help you overcome the challenges of the talent shortage, connect with us today: https://conseroglobal.com/request-a-consultation/

How to Be Audit and Due Diligence Ready at All Times

There’s at least one characteristic shared by most seed companies that achieve a successful exit: an early focus and emphasis on audit and due diligence preparedness. Unfortunately, many owners and CFOs don’t think about this as early as they should, which can lead to delays in deals getting done and lower deal values.

Why Early Preparation is Critical

A lack of audit and due diligence preparation can lead to lead to a number of problems, such as:

  • Internal control issues
  • Delays in deal completion
  • Higher deal costs
  • A lack of proper documentation
  • Overwhelmed staff

In a worst-case scenario, a lack of early preparation can lead to failing the audit and due diligence phase of the deal. Conversely, being audit and due diligence ready at all times can yield a number of benefits, such as:

  • A fast and simple due diligence and process
  • Lower audit fees
  • Less strain on employees
  • Preservation of valuation
  • Accelerated exit

Due diligence is part of a liquidity event, so it’s never too early to start planning for it. Follow these three tips to help your company be audit and due diligence ready at all times.

  1. Set Goals and Expectations

Start with the end in mind: What will you need to support a due diligence exercise? Of course, this starts with a set of financial controls and processes that will result in a clean audit. You’ll also need an approach to document management and a plan that supports an efficient and timely audit. Treat each audit as practice for when you’ll be going through due diligence.

Create a standard due diligence checklist (your banker or attorney can help you with this) and map your internal processes to the data needs outlined in the list. Not all items will be within your operational purview, so share non-financial items with other leaders to help them prepare. Often, the most troublesome areas are contract management and employee document management. You can save a lot of time in due diligence by keeping them well-organized and up to date.

A few questions to ask:

  • What are your financial and organizational goals?
  • What are your prescribed audit requirements?
  • What is the timeframe for a potential sale?
  • Are there proper staffing, processes and controls in place?
  1. Build Relationships

Identify and build relationships with professional service providers such as your Finance as a Service (FaaS) provider, banker, attorney, CPA and insurance broker. Tap these relationships regularly throughout the year — don’t just wait until it’s audit time to talk to these professionals. 

Consero, a Finance as a Service provider hosted a webinar titled: 3 Tips to Be Audit Ready And Why It Matters. The discussion was led by Mike Dansby, a CFO with more than 35 years of combined management and consulting experience in multiple industries including software, tech, and services. Leveraging a Finance as a Service partnership ensures you will be GAAP and ASC 606 compliant while also being Audit and Due Diligence ready. 

Consult with an audit firm to set a timeline that works for everyone and also talk to them about complex audit requirements. Many companies are now choosing to do their own quality of earnings analysis before going to market. Talk to a provider to find out how they might approach this and then incorporate their viewpoints into your internal reporting and review processes. The key is to gather as much data as you can ahead of time so the deal isn’t held up later when you’ve got a buyer.

  1. Make Document Preparation an Ongoing Process

Document preparation should be an ongoing process throughout the year — not a one-time event when there’s an audit. This requires documented and updated policies and procedures along with monthly balance sheet and account reconciliation. This can serve as the basis for audit review schedules, thus minimizing audit prep schedules.

Also stay up to date on accounting standards and pronouncements like those from the AICPA and remain GAAP-compliant at all times. And work with your human resources team to make sure employee documents are organized and digitized. Pay especially close attention to proprietary information agreements and intellectual property assignments. It’s nearly impossible to get these from employees after they’ve left the company.

Consider these specific document preparation steps:

  • Record company accounting and financial policies
  • Gather documents on internal control processes
  • Prepare reconciliation documentation for financial statements
  • Anticipate audit procedures and due diligence requests when designing day-to-day processes

How FaaS Can Support Audits and Due Diligence

Audits and due diligence exercises don’t have to be a necessary evil. You can impress your auditors, owners and prospective buyers by planning for these activities ahead of time and building their considerations into your day-to-day processes.

Consero Global offers Finance as a Service (FaaS) that can support your audit and due diligence efforts. FaaS is a modern alternative to building an in-house finance and accounting team that delivers greater financial visibility and improved operational scalability, along with a lower and more predictable cost structure. 

Contact with us to learn more about how FaaS can help you be audit and due diligence ready at all times: https://conseroglobal.com/request-a-consultation/

 

The Major Challenges Heading Into 2023 — and How CFOs Will Meet Them

There’s a long list of challenges facing CFOs heading into 2023. These include, but certainly aren’t limited to, ongoing supply chain issues, rising interest rates and energy costs, persistent inflation and slowing economic growth. CFOs should be asking themselves what can they do now to prepare for these challenges?

Biggest Challenges Currently Facing CFOs

In a survey conducted by Gartner in July, more than half (54%) of CFOs said that hiring and retaining staff is the biggest challenge they will face over the next 12 months. This was followed by accurate forecasting (36%) and strategic cost cutting (35%).

Commenting on the survey results, Gartner Vice President Marko Hovart stated: “The top three challenges are a reflection of CFOs’ struggles to manage against a backdrop of persistent inflation and unusually high macroeconomic uncertainty. CFOs need to identify the few critical areas where investments should be accelerated, such as human capital and digital investments, while optimizing costs against a backdrop of stubbornly high inflation. This is no easy task.”

Raising compensation, of course, is one way to hold onto employees, but this strategy alone won’t solve the problem. Instead, companies should refine their employee value proposition to reflect the expectations that many employees have now from their employers, such as more flexible work hours for a better work-life balance. Companies should also reexamine their recruiting strategies to make sure they are leaving no stone unturned when to comes to finding the right employees to fill open positions.

Driving Growth by Using Technology

As the finance leaders of their organizations, it’s important for CFOs to understand how to drive growth in the face of rising operational costs. Potential strategies include identifying new customer segments and revenue streams, as well as new product and service lines that can help ignite growth. New partnerships and acquisitions, along with fresh new sales and marketing strategies, can help accomplish this.

Technology can also help CFOs meet these challenges. Hovart mentions robotic process automation (RPA), machine learning (ML) and natural language processing (NLP) as a few technologies being used in the finance function to increase speed, accuracy and auditability. “What’s important is the ability to translate these digital workflows back to traditional workflows and stakeholders to explain how these technologies interact and improve them,” he stated.

At the same time, CFOs must be able to find finance employees who are comfortable using technologies like these and also possess the needed finance experience. “Finding talent that is willing to constantly evolve while at the same time relate back to the traditional way of doing things is a difficult thing to do,” Hovart stated. Some candidates may have the technology skills, but not enough finance and accounting experience, while others will have the necessary finance and accounting experience but not enough tech savvy.

Improving Forecasting Accuracy

Tools for improving forecasting accuracy vary from one company to the next based on how digitally mature they are and certain prerequisites that must be met. The best way to improve forecasting accuracy is to make sure that the company’s operating and financial models are in alignment, so the correct drivers of business performance are captured and analyzed.

A variety of tools are available to help companies build better forecasting models for improved operational management. These include ERP export modules, relational databases (e.g., MySQL) and power visualization software (e.g., Power BI).

Hovart recommended focusing on the short term to allow for testing of assumptions, as well as establishing metrics that enable tracking progress against benchmarks. “Broadly speaking, a good framework would be for the CFO to break down the components of what exactly makes up ROI, cost, return and risk and see if the investment reduces cost, increases returns and/or reduces risk,” he stated.

In the current environment, however, there are many external factors that affect a company’s ability to control costs. This has led to a greater focus on maximizing return and reducing risk with, as Hovart put it, “the hands that CFOs are being dealt.”

Using FaaS to Meet CFO Challenges

One strategy CFOs can implement to meet these and other challenges heading into 2023 is to outsource their finance and accounting function by switching to Finance as a Service (FaaS). The FaaS model allows companies to quickly scale up the finance function, standardize reporting across portfolio companies and reduce costs.

With FaaS, CFOs can focus on more impactful business initiatives while reducing the cost and complexity of maintaining an in-house finance operation. Employees can reallocate their time from administrative finance functions to high-impact business development initiatives, while companies can reduce staffing and technology costs in the finance department.

FaaS also provides more control over finances than traditional accounting systems. This will enable finance employees to spend less time on administrative tasks by eliminating the need for manual data entry while eliminating work cycle delays with automated processes and workflows.

To learn more about the benefits of FaaS and Consero’s integrated finance and accounting platform, please contact us at https://conseroglobal.com/request-a-consultation/

How Outsourcing Can Help Emerging Hedge Fund Managers Stay Focused on Managing Investments

There’s both good news and bad news for emerging hedge fund managers in a new report from Hedgeweek. First, the good news: Emerging managers have outperformed hedge funds for three consecutive years by an average of 4.8%.

Despite this, investors remain hesitant to invest in emerging managers who don’t have a strong industry reputation, solid capital base or structured team. These are the results of the latest Industry Report from Hedgeweek, The Next Generation: How emerging managers are adapting to the new hedge fund landscape.

Capturing Investors’ Attention

The Hedgeweek report makes it clear that emerging managers are struggling to capture the attention of hedge fund investors. More than eight out of 10 emerging managers (defined as those with less than $300 million in assets under management, or AUM, and fewer than five years of experience) say that attracting investor flows is their single biggest challenge during the initial launch process.

Despite this positive performance and their reputation at previous firms, nearly half (46%) of emerging managers said that it’s harder to raise capital now than it was a year ago. Two out of 10 consider a lack of an established track record and industry reputation to be major hurdles to raising capital.

One survey respondent put it this way: “You may have someone who has a ten-year track record in a particular strategy launching by themselves and even though you can follow the breadcrumbs of the track record, investors are still reluctant. It is frustrating,”

Caution Abounds

It’s not really surprising that after a rough start to this year, some hedge fund investors have decided to err on the side of caution. As another survey respondent put it, they’re looking to avoid the next “blow-up” and don’t want to take on what they perceive to be more risk with an emerging hedge fund manager. But while there may be more risk, emerging managers do offer value and the potential for strong returns, as the Hedgeweek report makes clear.

For example, emerging managers often bring innovation and a fresh perspective to hedge fund management, which can lead to novel approaches to their strategies. Complacency, on the other hand, can lead to sub-par returns. In the 2022 Alternative Investment Allocator Survey conducted by Seward & Kissel, more than 70% of investors said they have invested in managers founded under two years ago.

Investors tend to look for three key attributes in hedge fund managers:

  1. The manager’s return history and previous experience.
  2. Enough AUM to cover operating expenses and business risks to ensure that investors are getting the exposure and returns they expect.
  3. Proof of concept and faith in the manager’s investment process to give investors confidence that the firm will grow over time.

An Early Path to Institutionalization

According to one survey respondent, emerging hedge fund managers need a path to institutionalization early in their life cycle in order to meet investors’ expectations. “Investors aren’t waiting on the sidelines for new managers to produce a three-year track record,” he said. “They’re making allocations earlier in a fund’s lifecycle, and with earlier support comes accelerated expectations.”

One way emerging managers can stay focused on managing investments and attracting new investors is to outsource the fund’s finance and accounting functions to a third-party service provider. This will free up fund managers to spend more time focusing on alpha generation.

These services are sometimes referred to as Finance as a Service, or FaaS. FaaS goes beyond outsourced accounting to include a full suite of staff to support startup and launch efforts, payroll and HR support and financial records and planning services along with software that’s capable of managing the firm’s finance and accounting operations. In other words, FaaS is a one-stop financial and accounting services shop.

FaaS features flexible and transparent pricing, which makes it easy to forecast costs as the fund’s needs change in the future. This means that a FaaS provider charges based on the service offered, not by the hour or based on the level of staff assigned to the firm. As a result, hedge funds know exactly what they’re paying for and how their costs will rise or fall as they scale up or down.

Consero: The FaaS Specialists

Consero offers Finance as a Service to emerging hedge fund managers, PE/VC firms and their portfolio companies. If you would like to discuss the potential benefits of FaaS for your fund, please request a complimentary consultation

 

Startup Funding Continues to Fall: How FaaS Can Help Boost Efficiency and Lower Costs for Investor-Backed Startups

After peaking at the end of last year, venture capital funding in North America has started to decline. Total venture dollar volume for the quarter ended on December 31, 2021, was close to $100 billion, but this fell to about $63 billion at the end of this June, according to data compiled by Crunchbase. This was a decline of 27% from the end of March and 25% from a year earlier.

The funding downturn has been especially sharp in the technology, healthcare, software and life sciences industries. This has spilled over into private startup valuations. Investors have not been investing heavily in pre-IPO rounds, which has also contributed to the downturn.

Breaking Funding Down by Stages

The sharpest funding declines occurred in the late-stage and technology growth rounds. A total of $36 billion was invested into these growth rounds in the second quarter of this year, which was down 33% from the first quarter and 30% from a year earlier. This marked the lowest quarterly funding total at this stage since 2020.

Round counts, meanwhile, fell to 371, which was down 25% quarter-over-quarter and 27% year-over-year. Big late-stage financings were done despite cuts and contracting valuations at many unicorns.

Early-stage investing has seen less contraction than late stage. A total of $23 billion was invested in Series A and B startups in the second quarter of this year, which was down 15% from the first quarter and 17% from a year earlier. Round counts fell to 1,015, which was down 15% from the first quarter and 20% from a year earlier.

Seed-stage funding remained near historic highs in the second quarter, though it was down from its peak at the end of the first quarter. A total of $3.5 billion was invested in seed-stage companies in the second quarter of this year, which was down 30% from the record-setting first quarter and 6% from a year earlier. However, round counts fell to about 1,300, which was the lowest level in more than two years.

VC-backed Exits and Acquisitions

With regard to venture-backed exits, these are mostly coming from acquisitions. Acquirers bought VC-funded companies at a brisk clip, including several for more than $1 billion. While a few VC-funded companies made market debuts in the second quarter, the IPO window was mostly closed. 

As this data shows, the second quarter wasn’t great for VC-backed startups. Startups are facing more pressure to reduce burn and preserve cash reserves, especially given falling public market comps for unprofitable technology companies.

But there is a silver lining: Given the fact that the funding downturn has been much more pronounced at the late-stage growth rounds, investors seem to be more confident about the prospects for early-stage and seed-stage deals. These deals stand a better chance of reaching maturity under better market conditions.

Boost Efficiency and Lower Costs with FaaS

With the slowdown in venture capital funding, many companies are looking for areas where they can boost efficiency and lower costs. One way to accomplish this is to outsource the finance and accounting function using Finance as a Service, or FaaS. This approach goes beyond outsourced accounting to include:

  • A suite of remote and skilled finance & accounting staff
  • Well-documented processes with digital workflows
  • Cloud-based software that’s capable of managing the entire finance and accounting operation

Using the FaaS model can help PE and VC-backed businesses grow quickly while maintaining a low-cost finance and accounting function. FaaS offers flexible and transparent pricing, which makes it easy to forecast costs as a company’s needs change over time. The FaaS provider charges based on the services offered, not by the hour or based on the level of staff assigned.

In other words, you only pay for the finance and accounting functions you need, when you need them. As a result, you know exactly what you’re paying for and how your costs will change as you scale up or down.

Consero: The FaaS Specialists

Consero offers Finance as a Service to growing investor-backed businesses. Get an optimized finance and accounting function using FaaS and increase efficiency while reducing costs in the current tight finding environment. 

Contact us by requesting a complimentary consultation to discuss your situation in more detail.

Driving Change Through Finance & Accounting What Issues Are CFOs Grappling with Today?

A company’s need for an optimized and rigorous finance and accounting (F&A) function becomes critical after it closes an investment from private equity and venture capital institutional investors. 

Institutional investors immediately expect finance and accounting to serve as a value driver for the business by providing clean data and KPIs, along with strategic direction to the CEO, board and investors. Functional and technical skillsets and the ability to deliver timely and accurate financials are just table stakes.

Consero recently surveyed 100 CFOs of institutionally backed companies in the technology and business services industries to find out what issues CFOs are currently grappling with. More specifically, we wanted to learn what the optimal state, size and organizational structure are for the finance and accounting function as a business scales.

The survey also explored whether CFOs should consider investing at different inflection points as a business scales, as well as hidden costs and spending time on value-driving activities. In addition, the survey inquired about the expectations of CFOs in working with institutional investors and the board of directors and how partners with ready-made solutions can offer support at the most critical time in a company’s growth.

Following is a recap of the survey results broken down by the three main survey categories.

The Ideal State

With a short hold period, institutional investors have little time or patience to build an optimized F&A function from scratch or to curate a collection of talent. PE-backed companies need to know if they’re going in the right direction and be able to quickly change course if they’re not. Therefore, we asked the CFOs in our survey what are the most important F&A functions for optimal performance and growth. Here are their replies:

Functional skillsets of the team 20%

Ability to deliver timely and accurate financials 20%

Ability to deliver KPIs 17%

While CFOs stated that the emphasis on F&A hires should be on functional skillsets, they believe the emphasis on the CFO role should be on strategic planning. The survey respondents said that 53% of their time should be spent on strategic planning activities while 47% of their time should be spent on day-to-day operations.

The major consequences of a poorly run F&A function are an inability to make strategic investments and accounts payable/accounts receivable delays. Both were listed by 44% of the respondents.

Benchmarking the Back Office

One of the first things investors evaluate as part of their due diligence process is the cost and effectiveness of a company’s back office. Those CFOs that have previously run the investor gantlet warn of relentless pressure to optimize costs to free up dollars that can be allocated to top-line revenue generating efforts across sales and marketing.

Investors first look to overhead and fixed costs — this makes getting their own house in order critical for CFOs. Most survey respondents said that F&A spend should be less than 10% of company revenue. And three-quarters advise having fewer than 10 F&A FTEs at companies with $10 million or less in annual revenue. Even that finding belies the ideal efficiency that investors demand, given that recent data from Robert Half’s “Benchmarking Accounting & Finance Functions” report indicates businesses with less than $25M in revenue need only 3 F&A employees. 

The need to wring more functionality out of fewer employees necessitates an alternative approach. One solution is Finance-as-a-Service (FaaS), which can help reduce costs, increase efficiency and mitigate the risks to business continuity of the finance function. FaaS prepares businesses to scale and can be especially beneficial when you consider that 67% of the survey respondents said that as a company’s revenue grows, the percentage of revenue ration should decrease or stay the same. 

Hidden Costs and Risks

PE-backed CFOs need to watch out for hidden costs in terms of both expenses and time. It’s often assumed that companies on a growth trajectory will either be operating on an enterprise-grade solution or have the funds to upgrade as they grow beyond the small or mid-sized F&A software they were accustomed to. But this process is costly and time-consuming.

Nearly nine out of 10 (88%) survey respondents said they underestimated the time it would take for a full financial transformation that includes fully implementing an enterprise-grade ERP and the necessary software stack. This includes 62% who significantly underestimated the overall effort or underestimated by more than a little.

The true impact of this isn’t just late nights and a timeline far longer than many CFOs anticipated. The time and effort spent focusing on basic components like documenting workflows and processes is time not spent on the company’s most important strategic growth initiatives. This represents a worst-of-both-worlds scenario — incurring the risks of a suboptimal F&A organization while also spending an unrecoverable currency: the CFO’s time.

The CFOs in the survey agreed that most of their time should be spent on strategic planning. However, they estimated that they spend an average of 13 hours per week recruiting, assessing and hiring talent. This adds up to one-third of a standard workweek, or six full days every month.

The CFO as a Strategic Partner

Receiving an infusion of capital from private equity backing puts the F&A team squarely in the spotlight since it is tasked with meeting elevated expectations at an accelerated pace. The CFO is expected to deliver timely and accurate financials and produce clear KPIs while developing a forward-looking growth plan. This places a greater emphasis on the CFO’s role as a strategic partner to the CEO and board.

Fortunately, there are solutions to empower CFOs during this high-wire act. For example, FaaS will set up the F&A team for success while positioning CFOs to be the strategic leaders investors and CEOs expect them to be.

Consero can help you build an optimized F&A team using FaaS so you stay focused on strategic planning and other growth initiatives. Contact us by requesting a complimentary consultation to discuss your situation in more detail.

How CFOs Can Better Manage Key Relationships

Consero’s COO and CFO Mike Dansby recently served as the moderator for a panel hosted by The CFO Leadership Council’s Austin Chapter. Members of the panel — which discussed Best Practices for CFOs in Managing Key Relationships — included Dominica McGinnis, CEO and Executive Coach with BridgeField Group; John Berkowitz, Founder and CEO of Ojo Labs; and Tiffany Kosch, Managing Partner with CenterGate Capital.

The following is a recap of some of the highlights of the panel discussion.

The CEO-CFO Relationship

John Berkowitz started things off by pointing out that the CEO and the CFO are a duo so they should complement and augment each other. They might have very different personalities and styles — one might be more financially conservative while one is more aggressive, for example — but that’s OK. “Strong communication between them will lead to success,” said Berkowitz.

“Sometimes people will say, “This is what the CEO should do, or this is what the CFO should do,” said Berkowitz. “But this assumes that every CEO and CFO are the same — which, of course, they’re not.”

Dominica McGinnis added that while people often say that the CFO and CEO should strive to develop a strong relationship, they often don’t know how to do this. “CFOs and CEOs should try to get to know and understand each other not just professionally, but also personally,” she said. “They should know that they’re on each other’s side and are there to help each other succeed.”

A good CFO-CEO relationship often comes down to managing expectations and building trust. “They both have to be credible and reliable and selfless,” said McGinnis. She used a marriage analogy in describing the CFO-CEO relationship: “Sometimes it seems like CFOs are from Venus and CEOs are from Mars, so try to align around a common language and approach.”

“Figure out where you are in the relationship,” McGinnis added. “Have you experienced anything difficult together yet? If not, it can be hard to build trust.”

CFO Relationships with Board Members

Relationships between CFOs and board members can be some of the most vexing of all. “It’s an interesting dynamic,” said Tiffany, who called this a “three-headed dog: the CFO, CEO and board members.”

Berkowitz has an eight-member board for his company, Ojo Labs. “My CFO and I meet with each board member individually before the board meeting because they all have different opinions and view the business differently,” he said. 

CFO Relationships with Bankers

The banker relationship is obviously one of the most important relationships CFOs have. Berkowitz encouraged CFOs to put themselves in their banker’s shoes and think about what their banker needs from them to help their business succeed. “This way, when you need support, your banker will know you and your business and be ready to help.”

McGinnis stressed the importance of building a relationship with your banker before you need help. Dax Williamson, Managing Director of Silicon Valley Bank who attended the panel discussion, concurred: “I get several ‘ace in the hole’ cards every year to use with customers. I always use them with customers who have taken the time to build a strong relationship with me, not ones who show up once a year to renew their credit facility.”

Dax also stressed the importance of being transparent with your banker. “As bankers, we can always deal with bad news, but bad news deferred is never good,” he said. “If you have bad news about your business, share it with your banker immediately. Waiting is never a good idea.”

CFOs should view their bank as more than just a vendor. “There’s a big difference between a banker as a vendor and a partner,” said McGinnis. Dax added, “If you just look at us as your vendor and go for the cheapest source of capital, you’ll get what you pay for.”

Tiffany points out that private equity firms have long-term relationships with bankers, but the CFOs she works with might just be working with them on one deal. “So we start with what we call a ‘have a beer chat’ between the CFO and the banker so they can get to know each other.”

General CFO Relationship Management Advice

The panelists offered the following general tips for CFO relationship management:

Dominica McGinnis: “A CFO can be a bridge builder since you have interactions with so many people. Strive to be a trusted advisor both within your organization and with key stakeholders on the outside.”

John Berkowitz: “As the CFO, don’t limit yourself to just one role, like being ‘the cost cutting person.’ View yourself more dynamically.”

Dominica McGinnis: “Managing staff can be a big transition for new CFOs. It doesn’t matter what your title is: If you’re directing others, you’re a leader.”

Contact Consero Global to Learn More

If you would like more guidance on managing key CFO relationships, this article may be helpful. You can also request a complimentary consultation from Consero.