The middle-market private equity firm BV Investment Partners felt the finance teams at their portfolio companies were slow to scale and report data reliably. We spoke with Justin Kustka of the firm about what happened when they turned to Consero Global for help.

Industry observers like to stress that private equity firms can focus on long-term value creation at their portfolio companies, instead of facing the quarterly pressures that publicly-listed companies do. However, time is still of the essence. Their investment thesis often requires a radical transformation of the Company, or at least a radical uptick in growth and performance, all within the five to seven years that firms typically own
these companies.

So for private equity, the time frame is longer, but the stakes are just as high. The industry has enjoyed a long fundraising boom largely because portfolio companies so often accomplish more in less time than their public peers, even if they don’t face a quarterly verdict. Therefore, anything that slows or hinders a strategic initiative can jeopardize the outsized returns that LPs have come to expect.

BV Investment Partners subscribes to this “move fast and build things” motto, and it’s what allowed this middle market firm to thrive since 1983, with a recent close on a $750 million fund. So we sat down with Justin Kustka, a Principal with the firm, and asked what role Consero plays in the firm’s success.

Q: What caught your firm’s attention about the finance function at the companies within
your portfolio?

JM: One of the big pain points when we make an investment is the building and scaling of our finance teams. This includes the reporting of financial data, so that its streamlined and reliable. And our portfolio company CFOs can often get buried under a load of repetitive and less value-added tasks, so they don’t have a chance to address larger strategic issues.

Q: How did you address these problems in the past?

JM: Historically, if we wanted to improve the finance function from a talent perspective, we would look to recruit and to add to the team, most often through a recruiter, which would be a slow and prolonged process, adding a staff member one at a time.

The other piece of upgrading the finance function is technology. A lot of our portfolio companies don’t have particularly sophisticated systems, so right out of the gate, we think through the potential solutions, and scope out the different products we could implement. Then we select one option and go about implementing them, which can take almost a year.

The hardest part of this approach is we’d have to wait so long to discover if that system or new hire would work. Nine or ten months later, we might realize that this solution isn’t effective and have to start over, which is time we’d rather not waste.

Q: What made Consero intriguing to your firm?

JM: The Consero model was really interesting because it’s a solution that’s been fine-tuned over years and years. It’s purpose-built for addressing the pain points that I identified. They can come in and implement a system in months, and we can eliminate the sourcing of a given system and all the time needed get it up and running. And on the talent side, their team and resources can scale as quickly as we can grow. We’re not managing recruiters or wondering if the perfect candidate is even available.

Q: What’s Consero done for BV’s portfolio so far?

JM: So we’re using Consero at five or six of our companies at this point, which range from pure play technology or SaaS companies to tech-enabled services, of various sizes. These are often growing business that simply haven’t had the luxury of taking a close look at the finance function. Frequently, we’ll tap Consero right after the deal closes, but there are occasions where later in the life of an investment, we know the finance functions needs to grow and improve, so we bring in the Consero team then.

The fact is that Consero has allowed us to offload a lot of the back office and administrative workflows so the portfolio company isn’t burdened with the tactical elements of the finance function any longer. Now our CFOs are able to focus on more strategic decision making, and analysis, things like add-on acquisitions, enhancing growth strategies and providing better services for our customers. They get to collaborate with functional leaders to maximize value across the business. Everything from scaling the sales team, to developing the right marketing metrics, they can focus on the best ways to drive top-line growth.

For the portfolio companies using Consero, the biggest impact has been more timely and reliable reporting, which allows us to get info faster, and that translates into swifter and more consequential insights into the value creation at those businesses.

Q: How does Consero’s “Finance as a Service” approach differ from traditional
outsourcing of the accounting function?

JM: For us, “Finance as a Service” is a full solution as opposed to the traditional models that are more periodic or lumpier for the delivery of the solution. “Finance as a service” is repeatable, predictable and scalable and that’s a big differentiator in our mind.

We view Consero as a full finance factory for our portfolio company, from a people, processes and technology perspective. Here on the investment side, we don’t have to worry about it as we scale a portfolio company.

Q: What would you want a potential client of Consero to know?

JM: What stood out to us has been Consero’s user-friendly approach that starts at the implementation and the scoping of the project, but continues through the ongoing relationship management and day-to-day operations. It’s a big reason we’ve used them at so many of our portfolio investments, and why we refer them to our peers as well.

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When PE firms carve out a business unit to create a standalone entity, they shouldn’t neglect the culture surrounding the finance group, according to Mike Dansby, VP of CFO Services with Consero.

The lasting popularity of carveouts isn’t a mystery. Private equity groups can snag attractive assets that might have been neglected under a conglomerate’s stewardship. The parent company can shed subsidiaries to please noisy shareholder activists or reflect their own shifting priorities.  The market for carveouts remains vibrant as the wave of mega-mergers in recent years creates plenty of opportunities and PE firms have advanced their skills in this style of investing over the last thirty years.

This doesn’t mean that carveouts are ever simple. Their complexity is precisely why their prices are lower when compared to straight forward auctions. PE groups are offering their own sweat equity to create a subsidiary that can thrive all on its own. And no small part of that effort involves building various functions at the company that were once the responsibility of the parent.

The finance function is frequently centralized with the parent, leaving private equity firms to create their own solution for those tasks. But it’s not just a question of how a GP staffs or designs the process, although that’s important. “It’s also about building a culture around that finance group that gives them a voice beyond reporting the numbers,” says Mike Dansby, VP of CFO Services for Consero Global, a provider of outsourced Finance as a Service solutions.

Terms like “building a culture” can quickly devolve into a meaningless phrase nestled in an annual report or touted at this year’s LP Meeting, one that has no impact on how the business is managed. Everyone agrees that culture matters, but there are plenty of people who can’t articulate how that culture manifests itself in the org structure or strategic priorities.

Parental support

Dansby argues that carveouts often require that the new standalone business view the finance function in an entirely new light. Consero recently worked on a company that was being carved out of a parent that was less than 10% of the parent’s revenue. “The finance group was centralized in that larger company, so it had very little visibility to that subsidiary’s managers,” says Dansby. In fact, the subsidiary didn’t have a single devoted finance manager; they were merely a portion of that manager’s work portfolio.

“And within a company of that size, the unit doesn’t usually worry about money in a sense,” says Dansby. “They know that the parent would give them a budget and manage them in the context of being a smaller part of the overall business. The stakes of financial decisions were in some ways, lower.” However, as soon as a private equity firm acquires that unit, all of that changes.

“Those numbers that didn’t matter when there was a parent handling their finances, suddenly matter a lot,” says Dansby. “Performance may have always been top of mind, but now cashflow becomes a priority as well, since there’s no parent to step in and solve it. There’s a whole new level of accountability. A number that may have just been a number inside that conglomerate, that number becomes a central concern.”

And with PE ownership, that unit has a brand-new priority: enterprise value. “Private equity firms are there to increase the enterprise value of the business, so every decision is made with an eye on that, since it will determine how well that investment performs,’ says Dansby.

Beyond “bookkeeping”

So now, the finance group is tasked with a lot more than bookkeeping and reporting the numbers. The financial data has to be gathered and deployed in order to manage and grow the business. And the original managers of the unit may not appreciate that at first. Dansby explains: “In the case of that small subsidiary, they nodded when we said they’d need to build the finance function, and assumed they needed to add one financial manager and a clerk.” This told Dansby that they were only thinking of finance in the sense of the most basic accounting functions.

During due diligence for a new assignment, Consero will always take a holistic approach to serving that finance function. They’ll discern what, if anything can be brought over from the parent company, from staff to systems. “That ERP solution for the large company doesn’t make sense for the unit all by itself, and even if there are dedicated systems to that unit within the conglomerate, can it do what the independent unit needs it to do?” asks Dansby. Again, the technology needs to match the finance group’s new level of accountability and importance to the business.

Of course, the x factor in any conversation about culture building is the actual people. Is their staff willing to stay with the Company? Are they willing to learn new processes and meet the new demands of a stand-alone entity? “We find from time to time that folks will be resistant to change. After all, they may have twenty years’ experience with two or three companies to back up their choices,” says Dansby.

Consero will often argue that given their work with hundreds of companies within a client’s own industry, their processes have worked in practice. “More often than not, we can prove that our simpler, streamlined processes are an improvement, and they’re happy with the new process.”

Private equity firms can also play a role in building this culture by arguing for the resources and new processes to meet the new demands of the finance group. Dansby explains that when staff has been especially resistant to their approach, they’ve been able to convince the PE owners to step in and vouch for the reforms.

There’s a reason that carved out units are so often referred to as “corporate orphans.” They can be neglected, as they no longer fit with the parent’s strategic priorities, and they’ve not yet proven they can stand on their own. But an empowered and properly resourced finance function can do plenty to help that orphan grow into a thriving business, one that delivers on the promise of its investment case. And that’s a culture that certainly counts to the bottom line.

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Because an organization’s financial operations are a core function and crucial to sustaining its long-term success, it’s easy to assume that its finance and accounting structure should remain in-house where the business owners can maintain control. However, it’s because finance and accounting are so vital to an organization’s financial stability and health that decision makers should be compelled to turn to outsourcing finance and accounting.

In this comprehensive guide, we will discuss how finance and accounting affect the valuation of your company, why you should consider outsourcing your finance and accounting, areas of finance and accounting to outsource, and how to find an outsourced accounting service provider.

How Finance and Accounting Affect the Valuation of Your Company

If at some point, you need to seek funding or intend to sell your business, you need accounting valuation to value your company’s assets and liabilities. From cash flow to future performance and financial leverage, many factors determine the value of a company.

Factors like growth prospects and earnings history play crucial roles in the valuation of your business. The person appraising the value of your business will want to take a historical look at your income trends that may or may not devalue your business. They will want to examine your financial records to identify potential for future growth, which will increase valuation. Therefore, outdated and inefficient transactional processing and a lack of formal documentation policies or financial controls can hurt your business and impact the valuation of your company.

Consistent maintenance of accurate financial records is crucial to a company. It tells your financial story, showcasing your success while exposing your weaknesses. However, this transparency is crucial in making informed decisions. With accurate finance and accounting records, you can decide how to reinvest in your company, evaluating cash on hand and anticipated costs that may impact cash flow.

Because the structure of your finance and accounting function is vital to the success and growth of your company, you need accurate documentation and records, processing, proper support, formal policies, and financial controls. Unfortunately, not all companies, particularly fast growing  businesses, have the time, expertise, or leadership to ensure their finance and accounting department keeps them competitive.

Turnover, outdated systems, lack of talented in-house finance staff and inadequate budget to hire a strategic CFO can put the companies valuation at risk. For these reasons, companies outsource their finance and accounting. Outsourced accounting service providers can customize their services, providing companies with only the financial services they need to fill their gaps.

Businesses without an in-house CFO can benefit from C-level expertise and experience through fractional CFO leadership. Alternatively, a company that has an in-house CFO can become empowered when outsourcing to a Finance as a Service provider that provides reliable back-office services and customizable best-practice based processes.

Reasons Why Organizations Decide to Outsource Finance and Accounting

The finance department encompasses bookkeeping, controller services, financial planning, and analysis. It involves a myriad of tasks to ensure the upkeep and maintenance of the books and compliance with regulations and policies.

If an organization wants to scale, it will need to ensure its current employees can keep up with the demands of expansion. However, if they are bogged down with tedious, manual tasks, there is little time and energy to train and develop their skills for growth. Beyond ensuring their staff is equipped for expansion, management also must explore cost-effective strategies that minimize their overhead while remaining competitive.

Outsourcing has become a solution that offers many benefits, helping many companies maintain financial stability and scalability to achieve success. Here are the top reasons why companies decide to outsource their finance and accounting operations.

Salaried Staff vs. Fractional Professionals – Outsourcing your finance and accounting means reduced costs for your company. You would only need to pay the outsourced provider for the work they provide. The fractional use of finance and accounting professionals allows organizations to scale their operations without the high costs of maintaining a salaried accounting staff. When you don’t have to maintain full-time employees, you don’t have to factor in the additional costs of workers’ benefits like payroll taxes, medical insurance, vacation and sick days, and retirement plans.

Outsourcing also alleviates your human resource and hiring department of the burden of recruitment. Hiring new talent can be a long process. It involves placing job ads to attract talent, reviewing applications, screening, and shortlisting potential candidates. And once the right person has been hired, more resources will be needed to onboard and train them. It costs time and money to train new employees effectively. There’s also the cost of productivity loss if training means getting your workforce involved.

Help the CFO Focus on Core Business Growth Activities – Progressive CFOs know that they are of little value when they spend the majority of their days performing in-house transactional work instead of leading their finance team and focusing on high-value work. As modern leaders, they know that their competitive differentiator relies on their proactive decision-making, creativity, and analytical insight.

By outsourcing redundant and repetitive tasks, CFOs can use their valuable time and energy to lead the organization towards growth. With outsourced services, the CFO is supported by a team that manages all the daily financial needs. This team will also establish the financial controls that safeguard and monitor revenue and expenditures and implement enterprise accounting software.

Efficient Distribution of Tasks – Outsourcing frees your staff from the mundane and repetitive finance and accounting tasks so that they can focus on high-value work. An outsourced accounting service provider is ideal for companies that need to focus on their flexibility and scalability. Instead of leaving your staff to handle time-consuming and cumbersome tasks, they can add more value to your organization by getting further training to take on supervisory and other decision-making roles.

Access to Global Talent – Hiring an in-house finance and accounting team can limit your talent choices. You can only hire those who are either local or willing to relocate to work at your office. When you outsource, you gain access to a vast talent pool that may exist anywhere in the world. Advanced tools and technology allow top accounting talent to work remotely and efficiently from virtually anywhere and give you real-time visibility into your business finances.

Advanced Technologies and Systems – Small-to-medium enterprises may not always be updated on the latest finance and accounting applications. They may not have the expertise and knowledge on how to leverage them. And for many smaller organizations, these tools may be too expensive. External finance and accounting service providers invest in these technologies.

Therefore, when you outsource your accounting to experienced accounting service providers, you benefit from the advanced tools, technologies, and applications they use, transforming your outdated operations into modernized systems that are agile and strategic. This allows you to upgrade your operations without the high costs of buying and maintaining expensive accounting software and tools.

Better Processes and Accuracy – Finance and accounting service providers can support your daily financial operations thanks to their team of highly experienced professionals whose only focus is to deliver streamlined systems and processes that will help you scale. Armed with the right skill set and technology, they ensure that your finance and accounting operations run efficiently and effectively.

When you outsource, you can eliminate old-school manual accounting methods and replace them with automated and more streamlined workflows. Automating tasks like expense claim audits, analytics calculations, risk assessment, bank reconciliations, and analyzing and matching payments to invoices not only relieves your staff of the drudgery of time-consuming tasks, but it also significantly reduces the risk of errors.

Areas of Finance and Accounting to Outsource

Outsourcing finance and accounting to an accounting service provider doesn’t mean giving up your entire in-house team. The beauty of outsourcing is that you can choose the areas to be outsourced. For some companies, this means keeping their entry-level bookkeepers and outsourcing a fractional CFO. For others, outsourcing finance and accounting means maintaining an in-house CFO but outsourcing all the transactional financial processes. Here are the logical places to begin when it comes to outsourcing financing and accounting.

Bookkeeping and Back-Office Support – Outsourcing your bookkeeping can help your company address common issues most bookkeeping and accounting departments face without increasing staff costs. With outsourced bookkeeping, your in-house team is freed of burdensome back-end office tasks that can result in high employee turnover rates. With the right outsourced services provider, you can expect expert advice. You will also receive comprehensive reports that increase financial data visibility, which will lead to improved and informed decision-making. These include:

• Account Reconciliations
• Customer Billing and Payments
• Deferred Revenue
• Employee Expense Processing
• General Ledger
• Financial Reporting, Tax Reporting, and Reporting Automation
• Foreign Currency
• Month Close
• Multi-Entity & Multi-Currency Consolidation
• Order to Cash
• Payroll Administration/Services
• Procure to Pay / E-Payments
• Subscription/Maintenance Renewals Management
• Time and Expense Management / Expense Services
• Vendor Invoice Processing and Payments

Controller Services – Outsourcing your controller services can help grow your business to the next level with controllers that provide accurate and timely reporting, financial analysis, and strategic guidance and management. Controller services typically involve:

• Audit Report
• Compliance Management
• Employee and Vendor Communication
• Management Reporting
• Policy Adherence
• Policy & Procedures Guidance and Adherence
• Transactional Processing Oversight

Financial Planning and Analysis (FP&A) – Outsourcing your financial planning and analysis can help your business if your in-house finance and accounting team lack the expertise, time, and resources to drive financial performance and put you on the right track for growth. By outsourcing FP&A services, financial experts can give you an in-depth evaluation of your organization’s financial position, supporting you in the following ways:

• Acquisition Integration Support
• Audit Support
• Board & Bank Reporting
• Business Decision Making
• Company Financial Data Analysis
• Financial Leadership
• Investor Communication and Reporting
• Management Reporting and Narrative
• Planning, Budgeting, and Forecasting

How to Find a Great Finance as a Service Provider

Not all Finance as a Service or outsourced finance and accounting  providers are created equal. So when it comes to hiring an outsourced partner, you need to find a third-party solution that has the industry experience, certified staff, and service architecture that can elevate your business operations and performance. The following are conditions you should look for when deciding on the right accounting service provider:

High-Quality AI-Powered Technology – The whole purpose of finance and accounting outsourcing is to have a third-party service provider that will relieve your staff of mundane, manual tasks that cost you time and money. Therefore, the accounting service provider you outsource should be equipped with advanced tools and software that automate these tasks.

Cloud-Based Software Solutions – To benefit the most from artificial intelligence, you need a solution provider that can help you centralize your system, standardize it, and automate it. With all your financial data stored in the same place, you increase efficiency, share data effectively, and lower the risk of accounting errors significantly. When you outsource a team that leverages cloud solutions, you not only benefit from streamlined accounting processes but lower IT costs as it relieves you of the high costs of infrastructure and maintenance. Working from the cloud also results in the flexibility to scale your services to fit your unique needs because it is highly customizable.

Proven, Streamlined Processes and Controls – Great providers create value and give you a competitive advantage through business process excellence. The right outsourced service provider has a proven track record in designing and managing finance and accounting processes that save time and automate manual tasks that would otherwise waste employee talent and reduce morale and productivity.

The implementation of best-in-class systems and processes fast-tracks your organization towards growth and innovation. Only the best systems, processes, and controls can gain insight into your financial performance and health to eliminate silos, fill gaps, and improve productivity. They should also be able to guarantee internal controls for risk mitigation and data security.

Experienced Team – From entry-level bookkeepers to interim CFOs, the best outsourced finance providers can meet a variety of finance and accounting staffing needs, which include consulting services, finance services, and bookkeeping services. Because centralizing and automating your systems is a huge undertaking, you need to rely on an outsourced provider composed of experienced finance professionals who have fully developed and tested the technology.

However, the gauge for experience shouldn’t only be based on years of experience. Also, look into quality and industry knowledge, business intelligence, and their ability to leverage and manage technology-based solutions effectively.

Methods and Metrics for Measuring Success – As previously mentioned, accurate and proper transactional processing and reporting are crucial to your company’s valuation. The accounting solution provider you hire should make it a priority to not only implement the software but also provide the service of improving financial reporting. Therefore, the ideal finance and accounting provider should have developed methods and established metrics and KPIs that measure success and identify errors.

Ability to Provide Detailed Financial Reports – Investors and stakeholders will need to see performance reports to assess the financial health of the company. A great Finance as a Service provider is ready to provide detailed cash flow statements, income statements, balance sheets, financial statements of shareholders’ equity, and other relevant financial reports. The Finance as a Service provider must be able to achieve all this while maintaining compliance, particularly when it comes to taxes, audits, SEC reporting, and so on.

Collaborative and a Good Culture Fit – Cloud-based accounting software allows you the ability to view real-time data and access your financial data from virtually anywhere. This makes working with the service provider easier and more efficient. The right finance and accounting service provider should be keen on providing financial visibility through comprehensive financial reporting. You will work best with a Finance as a Service provider that has a service culture and value proposition that is willing to align with your company’s vision and mission for growth.

Conclusion

The right outsourced accounting firm and Finance as a Service provider should not only understand the financial side of your business but also have the knowledge and insight into your industry. They should be able to fill your finance and accounting gaps with modern software solutions and best practices. They should also be prepared to learn the complexities and uniqueness of your business, along with its specific financial goals.

Consero is a fully managed solution that implements the software and provides the service. Our cloud-based, AI-powered software is unique. It incorporates Simon, a voice-activated AI technology that functions similarly to SIRI and Alexa, but for accounting and finance.

With Consero, we customize your solution based on your in-house team structure and company goals. All of our teams are led by a high-level VP of Finance that manages a dedicated team experienced in handling transactional accounting. Depending on what model you choose, you may be more actively involved in managing the team, or you may be purchasing our growth model where we would play more of a management role. To discuss outsourcing your finance and accounting outsourcing and our customizable solutions, request a demo today.

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Private equity firms shouldn’t discount the role that sound financial operations and processes can play in selling a portfolio company, says Chris Hartenstein of Consero Global.

If fundraising was the sole metric of success, private equity could take regular victory laps these days. But investor enthusiasm for the asset class only speaks to their faith in future performance. Exits remain the sole arbiter of a firm’s track record, and GPs have been keeping assets longer these days, holding out for the best possible opportunity to sell. So when the right buyer arrives, it’s even more important that the due diligence process is swift and smooth.

Which is why we’re talking with Chris Hartenstein, Managing Director of Consero Global, to discuss the role that financial operations can play in creating the best impression for a potential buyer. Consero provides a Finance as a Service solution to a growing number of private equity-owned companies and has assisted GPs during every step of the investment cycle from initial due diligence to exit.

“One of the biggest factors in completing a sale is trust in the financial statements,” says Hartenstein. “If the buyer can trust that those numbers are reliable, they can trust their valuations that determine the offer are solid.” Most times when Consero begins working with a portfolio company, it is discovered that the financials are in disarray. “Sometimes we find that a Company hasn’t reconciled some accounts for six months or even a year,” says Hartenstein.

That means that a Company has to spend the time preparing the numbers for any buyer to review, and that can erode the enthusiasm for a given asset. But Hartenstein argues that once Consero has stepped in and deployed their processes and procedures, the books are quickly buttoned up and numbers are easily accessed. “When a buyer asks us for a bunch of schedules and we’re able to deliver them within the day, that makes quite the impression,” says Hartenstein. In one instance, Hartenstein saw a deal close thirty days after the LOI.

For a lot of companies in the lower middle market, it can be difficult to run the finance operations with best in class processes. They might have grown too quickly for their current financial staff resources, or simply not needed the rigor to process vendor bills or client invoices any faster. It’s one of the reasons that buyout firms will often tap Consero to step in and tackle the financial operations of a portfolio company they’ve just acquired.

One of the tools that Consero uses to “button up” the books, is ControlDock™, Consero’s proprietary system that works to calendar every task within the finance function and place it in a workflow. Nothing is considered closed until it gets the appropriate approvals from Consero, or the client’s Controller or CFO.  There are hard closes every month, with reviewed support schedules to match.

“This way, nothing falls through the cracks,” says Hartenstein. “And when a buyer needs a certain data point during due diligence, it’s right at our fingertips. SIMPL® is Consero’s financial management console that gives clients 24/7 access to everything from financial dashboards with real-time information at a glance to transactional level details and support documents all in one place.

Consero makes financial data accessible so the team isn’t drowning in requests for information. Working with Consero means that during a sale process, the portco’s finance staff doesn’t have to create anything from scratch.

Successful Exits: A case in point

A recent example of this is when PayPal, Inc. acquired Consero’s client, a payment processor named Hyperwallet.

• Client Name: Hyperwallet
• Size: $65M revenue with 325 employees
• Industry: Online Mobile Platform
• PE-backed by: Primus Capital
• Acquirer: PayPal, Inc.
• Exit Transaction: $400 Million
• Pain Points before Consero:
  • Frequent turnover in finance function, CFO too consumed with daily financial operations and not on strategy,
    financial reports  were created in Excel and needed more analytics
• Consero Solution: Finance as a Service
  • Consero handles all back-office finance & accounting  (transaction processing, closing, reporting) and FP&A
  • Benefits: Greater business continuity, time back to focus on the business, confidence that financials are timely
    and accurate, faster and more informed business decision making, optimized accounting
    policies/procedures/process flows

• Savings compared to In-House: 30%
• Client Highlight: CFO, Hyperwallet
  • “With Consero, I was able to focus on the transaction and not worry about getting the financials in order. Their
    professional finance team and processes inspired confidence for everyone involved in the due diligence
    process.”

Consero’s Finance as a Service solution can be kept in place even after an exit transaction. “In many cases, the acquiring firm sees how efficiently and accurately we handled the finance function for our client, so it isn’t a pain point for them,” says Hartenstein.

Frequently, even when smaller companies are acquired by larger strategic buyers, Consero remains on board. “Often, the buyers simply have more urgent priorities,” says Hartenstein. When another private equity firm is a potential buyer and they have an accounting firm like PwC look at the financials, they soon realize there’s no need to restructure the financial operations. “Even if the PE firm ends up replacing the CFO, we have a training process to get them up to speed on how best to employ us,” says Hartenstein.

Successful exits are never merely about how buttoned up the books are, but one way to look at the value of sound financials is that the numbers tell the story of all the value a private equity firm created during its ownership. If that story is confusing or poorly told, or not substantiated quickly and adequately, the buyer may not always wait around for the seller to get their story straight. And that’s certainly a threat to a happy ending for that investment, or that firm.

Learn more about how Consero helps investors and their portfolios today.

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Investors rely on valuation, i.e., several metrics and numbers that tell them an investment is worthwhile. These numbers and metrics must paint a good picture. However, when your finance and accounting function is not good, there is basically no way to prove that an investment is sound.

That can become a much bigger problem than many might expect. You need a lot of different things that will determine the value of a company or some other investment, such as:

• Financial leverage
• Financial return expectation
• Cash flow
• Future performance
• Exit strategy

These are just some of the metrics and numbers that need to be conclusively proven by the finance and accounting team. However, if that whole function is not operating to its fullest capacity, or is simply not qualified enough for it, then you’re going to have problems and risks.

That’s precisely what we wanted to talk about in today’s piece. Furthermore, we will also show you the solutions you need to avoid these risks.

The hidden risks for investors from the finance and accounting function

A lot of problems can arise in poor finance and accounting functions, and many of those can affect your investment and create unnecessary and potentially devastating risks.

One of the common problems arises when transactions take place. Your finance and accounting team needs to have supporting documentation and several buttoned-up processes. Without these in place, your transactions won’t run smoothly. They usually become a tedious process that can lead to delays and failures. However, that’s not all, as lower valuations are also a very likely outcome of poor transaction processes.

Naturally, this can reflect on the customers as well. When transactions involve them, they expect your growing company to be a professional one that can handle transactions without a hitch. However, with a poor finance and accounting function, you carry the significant risk of this not happening. That’s because the entire transaction process needs to be supported by valid documentation provided by the finance and accounting teams. If that doesn’t happen, the customers lose trust in the business, which can lead to poor valuations.

Another problem can exist with financial reports, which are necessary for every business. These include:

• Income statements
• Cash flow projections
• Balance sheets
• And more

However, finance and accounting don’t always produce useful financial reports. They often make the mistake of making them overly complicated and riddled with mistakes and errors. It’s not easy to continuously deliver great financial statements. They need to be:

• Detailed
• Accurate
• Timely
• Future-oriented
• Easy to digest

Without having all of these attributes, your financial reports could cost you. They can lead to reduced valuation, among many other problems and risks.

Besides technical problems like these, finance and accounting functions carry other risks like member turnover. They can leave the company for a wide variety of reasons, and it’s a common problem in all companies. However, it becomes a more significant issue when the turnover rates are higher than usual, and when the people who are leaving are your top talent. This is an issue for finance and accounting teams as well, where the loss of a key figure can create many other problems.

Key figures like CFOs and controllers enable your finance and accounting function to operate well, but without them, you run the risk of the entire team falling apart. That’s because some members can be replaced, and the interim period won’t affect the function significantly. But the loss of a critical member will affect functionality significantly, and the transitional period can be devastating.

How to avoid the risks

As you can see, the risks are many, and the ones we covered are just some of the most prominent ones. There’s a whole host of others that can cause your valuation to go down, which is why it’s vital to do what you can to avoid them.

More and more, private equity firms are turning to Finance as a Service and find that to be the best way to avoid the risks that are inherent in the finance and accounting function. Outsourcing with Finance as a Service means you plug into a partner that has already built the processes and systems hundreds of times and have the finance talent with the right skill-sets to meet all your F&A needs.

In today’s world, outsourcing is becoming more prevalent than ever before. It’s no wonder as it’s often far better to outsource to a professional team that’s much more capable of doing the job than an in-house team could ever hope to be.

That’s especially true with the finance and accounting departments. As you’ve seen, they carry a whole host of risks and possible issues. In the case of third-party solutions, these problems don’t exist.

The most obvious problem that’s avoided is employee turnover. The third-party business has its own employees who are qualified and will not abandon your business for a better paycheck or some other reason. On top of that, you pay for the service, not the employees, so there’s no worrying about numerous paychecks, vacations, and benefits. That makes the outsourced solution a cost-effective one as well.

When it comes to technical risks, almost all are avoided with a third-party. For example, we at Consero have experienced team members who will improve your financial transactions. They will:

• Improve the quality
• Increase efficiency
• Reduce the costs

Our team will do this for all of your operations, including financial statements, as well. They do them all the time for a whole host of growing companies. Plus, mistakes and errors are avoided because transactions and reports are automated through our high-quality software solution.

All in all, if you decide to hire Consero, you will receive a high-quality service that has your entire finance and accounting functions wholly integrated and streamlined. The problems that in-house teams need to deal with regularly will be eliminated. Most importantly, we will help you avoid all the risks and potential issues that can affect your valuation.

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Mergers and acquisitions (M&A) deals tend to fail. We all know that to be the case. Research supports this knowledge as well, as the rate of failure in M&A deals is around 50%.

We are well aware that you are preoccupied with many challenges that go hand in hand with M&A deals, and it’s easy to miss certain details.

In our research, we’ve found several common themes that continue to reappear. Over time, we were able to pinpoint the main reasons why M&A deals tend to fail, and we’ll cover all of them in this article.

Lack of involvement from the owners

It’s vital to appoint M&A advisors in all mid to large-size deals. However, there is no need to leave everything to them. If the owners don’t get involved in the process, the sale can quickly fall apart.

This is important because:

• Owners are the ones who need to lead things after the deal is over
• Advisors are the ones who need to be advisors only, not the leaders

Besides the fact that this increases the chance for the deal to go through, it also builds experience, which ends up being a lifelong benefit for the owners.

Surprises in the due diligence process that lead to lack of confidence and trust

It’s a common occurrence that there isn’t enough transparency between the two parties involved in the deal. With such a lack of transparency – surprises quickly become a more common occurrence than they should. These surprises often end being unpleasant, which usually leads to a lack of confidence and trust from the buyer.

Companies need to show full transparency in any M&A deal. The due diligence process is precisely where companies need to prove it. They need to help the buyers by being transparent and by offering tools that create more trust.

Missing essential dates also leads to lack of confidence and trust

Surprises are not the only things that can kill a deal. When buyers or sellers miss important dates for finishing a vital task, they can similarly kill the deal. That’s because missing deadlines ruins trust and confidence, which in turn tends to lead towards the agreement falling apart eventually.

The other party loses motivation for finishing the deal once they lose confidence in the first party.

Such devastating results can easily be avoided by adhering to dates. It’s thus vital to set them in accordance with the wishes and the means of all parties involved. It’s also beneficial to make room for the modification of these dates, if necessary.

The numbers change during the sales process

We can all guess that one of the main reasons why these deals fail has got to be in the numbers. It turns out that this is true. We’ve noticed a connection between:

• M&A deal failures and
• A drop in cash flow and revenue of the company being acquired

It stands to reason that buyers want profitable companies. If they notice a dip in these vital metrics during the sales process, they will at least reconsider their decision and start renegotiating the price. In most cases, they’ll eventually back down, however.

The problem with this mostly lies in the company that’s about to be purchased. Their management and financial teams start to concentrate on the sale negotiations, so they stop paying attention to how the company is doing.

Lack of clarity in the post-merger integration process

Once the deal is struck, there are still hurdles to overcome. However, many companies fail here, as they are not careful and detailed enough in the integration process.

Without careful appraisals, deals can ultimately fall apart, but by having them, you can identify:

• Vital projects
• Crucial products
• Delicate processes and other similar matters
• Key talented employees

When all of this is assessed, you can find the right methods for transparent and successful integration.

Issues with the buyers

In most M&A deals, most of the problems that can arise, usually stem from the sellers. However, sometimes, buyers can cause issues as well.

Many reasons can be the cause of this:

• The buyer is not showing enough motivation
• Financial stability of the buyer declines during the due diligence process
• The buyer’s advisors decide that the deal is bad for their client
• The buyer is not sticking to the dates set by all parties

Inaccurate or incomplete information

People make mistakes all the time – it’s completely normal. However, when sellers provide incorrect or incomplete information to buyers, the result tends to be a nervous buyer who eventually backs out of the deal.

Such mistakes can easily occur in the financial information, which is why it’s vital to have a third party reviewer. They can review all the information and make sure that no mistakes occur. Plus, they use technology that helps automate many of the processes involved, which results in less inaccurate and incomplete data.

Emotional unpreparedness of the buyer or seller

It’s often said that emotions don’t have a place in business, but we are all still humans who will forever have feelings.

For that reason, it can easily happen that either the buyer or the seller get cold feet during the M&A process.

• The buyers get cold feet if some material issues arise or if they realize they are not ready to have another business
• The sellers get cold feet when they are not emotionally prepared to leave the company they built

Whatever the problem is, getting cold feet results in a lot of money, time, and energy being spent for nothing. That’s because most people back out of the deal at the very last moment.

It’s thus vital to determine if the buyer or the seller is emotionally unprepared at the very start of the process.

Issues stemming from the market itself

Sometimes, problems arise that are beyond the control of all parties involved in the M&A deal. The general market may be performing poorly, which results in a bad market for the seller as well.

On the other end of the spectrum, the market can be great, but that can also result in a large number of companies on the market and thus fewer buyers.

You can do nothing about the market, but you can still ensure that the business is always in the right condition to reach a favorable deal when you can.

So, there you have them – the main reasons why M&A deals fail. By identifying them, you can easily avoid them and ensure that your own M&A deal reaches the resolution you seek.

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Private equity firms experience many problems in the post-acquisition period. The portfolio company is acquired, but now what? How do you turn the company into a money-making machine that will eventually result in a satisfying ROI?

Out of the many things that you can do, we wanted to focus on one thing in this article. We wanted to focus on real value creation in the post-acquisition period.

The main problem here is that many private equity firms do not fully appreciate that financial reporting is a vital part of this. To create value after an acquisition, you need to upgrade the financial reporting processes in the acquired company.

In our experience:

• Many private equity firms omit the fact that upgrading financial reporting is a big part of post-acquisition value creation.
• An even bigger number of companies appreciate that upgrading is necessary, but they rarely understand to what degree.

To help you with this, we wanted to focus on three primary ways through which you can get real post-acquisition value creation. Let’s take a look at what you need to do.

1. Thoroughly assess the internal controls of your acquisition to determine the right type of finance & accounting infrastructure

Private equity sponsors expect rigorous reporting from their portfolio companies from the very start, but many of these companies:

• Are not able to meet these standards so early
• Have never had a major external audit (usually performed by a large or regional accounting firm)

The management of the portfolio company needs to gather a substantial amount of information for the private equity firm. They are usually unprepared for this. However, the problem also lies in the private equity firm that assumes their acquisition can handle the gathering and analysis of such large amounts of data.

It’s precisely for this reason why a thorough review from the very beginning is essential.

While assessing the finance & accounting function, you can get a clear picture of the state of your acquisition’s internal controls structure. The evaluation can reveal several areas of improvement and what can be done:

• Ways for allocating the costs
• How to improve the cash flow 13-week forecast
• A way to get a multi-deminsional view by product line or location

Additionally, there’s a significant potential for finding a way to speed-up the entire financial reporting process for the acquisition company.

However, you need to be prepared for the fact that a full assessment can be rigorous. That will depend on factors like:

• How you address the reporting requirements, which is always different with every private equity firm.
• The date of the latter reporting period.
• How quickly the seller needs to prepare for an external audit.

2. Have the right talent in the team

It cannot be stressed enough how the right talent is crucial for the financial team of any company. That’s especially true with new acquisitions because they tend to have small financial teams that could lack the necessary skills and experience required to provide the results private equity firms seek.

We’ve found that many private equity firms are usually surprised to learn this. They rarely realize that these companies have financial teams that are more focused on bookkeeping than on collecting, compiling and analyzing monthly reports.

To rectify this, you need to opt for one of the two main approaches:

1. If the team is reasonably knowledgeable, they can get the job done. They only need to be sufficiently trained on how to properly do financial reporting for their private equity sponsor. They need to learn some things like:

• How to prepare monthly financial statements and reconciliation statements
• How to prepare budgets that are 100% accurate
• How to prepare a financial forecast
• How to improve the financial close, i.e. its aptness and effectiveness

2. If the team does not possess enough knowledge, you might need to replace them with the right talent. If replacement isn’t an option, you could opt for bringing in outside help. Many strategic PE firms are opt for third-party experts like Consero, who have skilled finance talent to get the job done.

By having a strong finance team in the new acquisition company, you’ll effectively streamline the entire financial reporting process. Additionally, they will also become better positioned to gain the right insights from the information they collect.

3. Learning how to improve the speed and efficiency of financial reporting

In the end, you need to look closely at the actual financial reporting of your acquisition.

We at Consero are well aware that private equity firms have a specific approach that includes:

• A high emphasis on important metrics
• A detailed and specific methodology for reporting metrics

As we’ve already established, most acquisitions are not at the level where they use the same methods and the same focus on metrics. Management will most certainly struggle as they:

• Don’t have the ability to track financials and report the metrics that their PE sponsor wants to see
• Can’t provide accurate reports on cash flows, net revenue, and all the various expense metrics
• Can’t provide all the necessary reports in the desired timeframe

This level of proficiency requires time and resources. That’s why they have to start the process of improvement as early as possible. You also need to ensure that the management of the portfolio company fully appreciate this.

To find the most optimal way for improvement, you need to find answers to several questions like:

• How many business units does your new acquisition have?
• Can you organize the business units into a single framework for reporting and controls?
• Can you use the existing methods of other portfolio companies to improve the system of the new acquisition?

Once you gain the answers to these questions, you’ll have a clearer picture of how to approach the improvement of financial reporting.

The bottom line

As you can see, improving the entire financial reporting process to create more value from your acquisitions can be much easier than it sounds.

The only important thing you need to remember is that it’s crucial to start everything as early as possible. As soon as the portfolio company is acquired, you need to begin the process of improving financial reporting proficiency.

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When private equity firms invest in a company, it is inevitable that changes will be made. There are several key factors that they look for when investing in a portfolio. Some of those factors may need adjusting because they want to ensure the investment they are making will pay off.

In most cases, a PE firm will ask the company to start operating at a faster pace.

Consider this:

• In typical public companies, they report to the board four times a year.
• In PE-owned companies, they have to report more than once in every quarter.

PE-owned companies usually have to give detailed financial reports every month. Every time the PE firm wants to see these reports, they always go to the CFO.

The CFO is always the first stop

The CFO is usually the leading partner to the PE firm.

The PE firm will always want to contact the CFO because:

• They are the main channel through which the PE firm can understand if their investment is safe.
• Through the CFO, the PE firm can see whether or not the company is growing at the pace they want it to grow.
• The CFO can assure them that the bottom line is fine.

There is one simple fact that companies receiving PE investments need to know – the PE firm cares about the short term. They want to see that the metrics are exceptional at any given moment. This is because most PE firms are looking to exit in three to seven years.

Due to the financial concerns of the PE company, a CFO needs to understand several important things. They want the CFO to:

• Grasp their urgency
• Stop spending their time on anything that seems trivial to the PE firm
• Focus on the bottom-line results
• Operate at a faster pace

If a CFO is used to working at a slower pace, that’s usually when the PE firm will want to see improvements. They may want the CFO to lead the finance department faster than their usual pace and challenge their conventional method.

Additionally, the PE firm will want to remain assured that their investment is safe. The CFO needs to be prepared to provide accurate and timely financial reports that adequately portray how the company is fairing at any given moment.

So, what do PE firms want to see in their CFO?

• The CFO must be confident in the data they are giving
• The CFO should be comfortable with technology to better collect and report data

These traits are not something that every CFO has. However, they are necessary for survival and thriving in a PE-owned company.

The CFO needs to dedicate themselves to the company as that’s what the PE firm expects. However, they can be confident that this will yield great rewards in return. When the company gets sold to another PE firm or goes public, the CFO can expect large compensation packages. The size of the package often goes in line with how well they performed.

So, how can a CFO achieve all of this? What should they have and do to be the best type of CFO the PE firm might want to have?

The right attributes in a CFO of a PE-owned company

To identify the right traits and attributes the CFOs in PE-owned companies need to have, we looked at what executive recruiters are looking for in potential candidates. We at Consero have found that the following traits are the ones CFOs need to have:

• A desire for becoming game-changers, not just money-makers
• An ability to keep up with the faster pace PE-firms require from their portfolio companies
• A good understanding of technology, systems, and processes
• A sense of purpose, as well as a strong appreciation for urgency
• A strategic outlook on their job
• A wish to concentrate on the long term, by forgoing short-term gains in favor of larger payouts at the end
• Motivation and capability of being a true partner of the CEO

All of these traits are what a CFO needs to possess if they want to be the best CFO for a PE-owned company.

Understandably, not every person is capable of being a person who can have all of these traits. Many professionals simply lack the skills, experience, and personality that goes with these traits. Such people cannot succeed as part of the senior management in PE-owned companies.

That’s something that executives are well aware of. Many are prepared to jump at the opportunity of obtaining such talent for their portfolio company. It’s thus vital for PE firms to appreciate this fact and be ready to do the same as these individuals are rare.

Whenever they are noticed, it won’t take long for them to get the right offer they will gladly accept. It’s important that this offer is good enough and that it comes from you, not your competitors.

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