Back Office Holding Back 3

How private equity investors can get the most from their CFO

GPs may be eager to leverage the talents of portfolio company CFOs, but managing the tactical responsibilities of the finance department can interfere with the CFO’s ability to develop larger strategic initiatives. Consero Global’s Natalie Townsend suggests how PE firms can make the most of their Chief Finance Officer’s real skills.

PE fundraising may be booming these days, but that’s also creating sticker shock for assets. So GPs have to drastically improve a business to warrant the price, putting pressure on the portfolio company’s senior management team to make major strides. And the CFO plays a big role.

But for a lot of middle market businesses, running the finance department is a full-time task and leaves little room for that CFO to work closely with the CEO to restructure, or more to the point, revolutionize that business. That is why some GPs have begun outsourcing the accounting and finance function to Consero, so that CFOs can move beyond the day-to day duties and focus on bigger strategic initiatives.

“A lot of PE firms we meet with are frustrated that as much as they want a more strategic CFO, most of the time these executives get mired in the details of the finance departments,” says Natalie Townsend of Consero Global. “They may hire talented folks, but they only get to use a fraction of their actual capabilities.”

“I’ve always strived to back or hire strategic CFOs,” says Scott Donaldson of CIC Partners. “But it’s hard to manage the finance and accounting functions while contributing to strategic initiatives, so they often don’t flourish as much as we’d hope in these situations.”

It might seem natural that the CFO spend time on such operational tasks as closing the books each month, generating financial reports, making sure all transactional processing is taking place and that they can get through an audit with timely and accurate information. Beyond that, they often ensure systems are scalable so if the business were to grow, accounting and finance wouldn’t slow that down. That’s not even addressing the HR component, when the CFO has to find a replacement when staff leaves.

In large companies, there might be enough resources to minimize the CFO’s role in these tasks, but on the lower end of the middle market, finance can be quite leanly staffed. “So at Consero, we take all those tasks off the CFO’s desk, so they don’t have to worry about staffing or systems upgrades,” says Townsend. “And if any of the operational tasks aren’t completed to expectations, that CFO knows they can hold us accountable.”

Tapping Consero’s Finance as a Service (FaaS) allows smaller companies to upgrade their accounting and finance teams in a fraction of the time a CFO would be able to build a new team from scratch. “The nature of private equity is to act quickly, and Consero allows the CFO to shift gears from the basics to assessing larger changes to the business, which is exactly the type of work that attracts top tier finance chiefs,” says Townsend.

She explains it’s really an alignment of interests, since the CFO gets to focus their attention on the high impact activities, while Consero leverages their expertise in providing best in class service in these tactical areas.

“Make no mistake, the tactical duties of the finance department have to be accomplished with speed, accuracy and care,” says Townsend. “Especially since poorly managed books can trip up the due diligence process when the PE firm is looking to sell the business. That’s the table stakes here.”

With the tactical side of the finance department handled, some PE firms are finding novel ways to leverage their CFO talent. “Some smaller enterprises don’t have enough truly “strategic” work to interest major talent,” says Townsend. “But that doesn’t mean those companies don’t need great ideas and someone to guide them to fruition, so they might put the CFO to work at two or three portfolio companies to create a full-time slate of work.” This way, each smaller company gets the benefit of a talent they couldn’t afford full time, and that CFO remains intellectually challenged.

There might be a CFO that actually wants to manage those tactical activities, but they may not be the ideal CFO for a PE-owned business. “If that CFO wants to devote themselves to the basics, they might be more suited to a Controller role and not the right fit for a radical improvement plan,” cautions Townsend. And there are plenty of these standard issue CFOs/Controllers at the lower end of the middle market.

This doesn’t mean that PE firms need to settle. “Consero has been really useful in upgrading the finance and accounting functions in portfolio companies, which enables higher caliber CFOs to focus deliver the investment case,” says Donaldson.

And these days, that investment case is most likely ambitious, which means that the basics need to be handled, because only real innovation and strategic thinking will deliver exits that will make the price of that asset a little less shocking.

The art of the roll-up, part I: The value of a smooth integration of the finance function

As buy and build strategies became a staple strategy for private equity firms, it’s important for firms to remember the value of a smooth roll-up of the finance function.

 

We spoke with Consero Global’s Chris Hartenstein on how Consero helps companies seamlessly bring new acquisitions into the fold.

Bain’s 2019 Private Equity Report recently found that buy and build strategies are more popular than ever. While the study admitted data on the trend can be hard to track, they cite that in 2003, only 21% of add-on acquisitions represented the fourth such acquisition for the platform company. Today, that number is nearly 30%, with 10% of those representing the tenth add-on acquisition.

The study reports there are solid rationales for that popularity. With asset prices so high at the moment, the acquisition of a platform entity may justify paying a premium, since they can acquire smaller companies at lower multiples. And naturally, the larger company hopes to enjoy reduced costs, and increased top-line growth.

But that potential upside is predicated on a savvy integration of staff and processes, not the least of which is the finance function. For platform companies, speed is of the essence, since there is often another acquisition on the way. And if the integration stumbles, or the finance staff doesn’t prove adequate, it can drain time and energy from senior management.

Chris Hartenstein has navigated many a roll-up during his time with Consero. Consero offers an outsourced financial solution for small and middle market companies, which are precisely the kind of the enterprises that private equity firms target. He suggests PE firms develop a process for rolling up the financial function of a platform company early, and ideally start by bringing the platform company in line with the standards and the systems they expect and need.

“We’ll get the call from a company usually within a month of the LOI, and start working towards being ready for day one,” says Hartenstein. “We have an acquisition playbook of 35 points we run through for the first month we’re there,” says Hartenstein. There’s only so much to be done before then, since typically the client and therefore Consero won’t have full access until the deal closes.

Their process begins with a rigorous assessment of the finance function, and then continues with the implementation of the technology stack and best practices and processes in line with the client’s preferences. Typically, it only takes Consero a month to get a company’s finance and accounting fully integrated and supported as part of the acquirer’s business. Although, for larger companies, in the range of $50 million to $100 million, that timeline might stretch to sixty or ninety days.

But after the platform company is done, Consero can work with remarkable efficiency on subsequent acquisitions. “Once the foundation is set for Company A, it’s only a matter of applying those policies, procedures, and schedules to each new acquisition.” The staff that’s already working for Company A isn’t distracted by bringing the new acquisition into the new system because Consero has a dedicated implementation team that tackle that job. Each new acquisition becomes easier since that team is working off the structure that’s already been built for Company A.

“Let’s say for Company A, we’ve identified a standard chart of accounts to utilize; when we get to Company B, we’re duplicating the chart, and we’ll map the acquisition to that. We’ll have standardized the accounts payable process, with the rules and workflow. All we need to do is plug in the appropriate approvers and payers,” says Hartenstein.

And that means the new acquisition meets the same standards as the platform company far quicker. But that also argues a PE firm should tap Consero for the platform company first, before any other acquisitions are completed.

“There’s a lot of clean-up work to be done, as the first company may not have been really consistent in generating monthly financials, or doesn’t have all the work paper schedules in order, and we have to recreate them,” says Hartenstein. And for that, Consero brings on a separate group, called the COE (“Center of Excellence) team to put things in order.

While the platform company may be tempted to hire an outside consultant for that kind of work, the difference with Consero is that as the company’s finance and accounting department is fully implemented with ongoing deliverables supported by Consero. So, they have a vested interest in making sure all accounts are reconciled and supported appropriately.

And Consero tends to stay on board with the platform company even after the private equity firm exits the investment. “We pride ourselves in providing potential buyers with accurate and timely information during the due diligence process,” says Hartenstein. And this frees the buyer to focus on the value the PE firm has helped to create, and the runway that’s left.

Buy and build strategies may be here to stay, but that doesn’t mean they’ll get any easier, which is why it’s all the more crucial to get the finance function in order and running smoothly. As any successful buyout firms learns, the most brilliant strategy doesn’t matter if the execution isn’t there, and partners like Consero are there to help get the basics in order as soon as possible.

Read “Art of the roll-up, part II”

Why private equity firms get meaningful partnerships by outsourcing

Choosing to outsource accounting and the administration role is a huge decision for every private equity fund manager. With that in mind, we are here to talk about all the benefits that a manager can get by doing so, which should give them confidence when making a decision to outsource.

 

In the last year or so, private equity (PE) has had a lot to be optimistic about, especially in the area of money as PE firms now have nearly $1 trillion at their disposal. There’s certainly a lot of investor demand, but they are still very likely to be careful with where they allocate that money.

Investors need to be confident that managers know what they’re doing, and part of the process most managers use today is focusing on the task at hand. That has led to the adoption of outsourcing. According to PwC:

  • 70% of PE firms in Europe are actively outsourcing
  • But only 30 to 40% are outsourcing in the US for now

The experts are doing the job and are helping the managers

If you partner-up with the right third-party firm, you can get a level of operational expertise for an excellent price, which is only part of the benefit. In addition to that, managers have the opportunity to have more time for other crucial matters – like focusing on their assets, i.e., the employees, which they cannot get easily and in large numbers due to their cost.

However, a manager no longer needs to hire certain people, if they opt for outsourcing the administration of their accounting and finance. Through outsourcing, they get access to a highly skilled team of experts that will do that for them by using advanced industry knowledge and the most innovative technologies.

The more help the private equity firm gets from trusted partners, the more effective they and the entire front office can be. They become more efficient in:

  • Sourcing deals
  • Generating the best performance in investor funds

Managers also get help in investor relations when dealing with:

  • Capital call letters
  • Cash flows coming and going out of the fund
  • Capital contributions

All of this gives comfort to investors and managers, but also to auditors who rarely find mistakes on financial statements they audit.

A vast majority of experts now believe outsourcing is more advantageous than keeping the admin function in-house

Outsourcing is no longer a trend; it’s becoming an established pattern for many PE firms. Investors see the benefits. They now know that, by outsourcing the admin function, the PE firm can have more time to focus on:

  • Sourcing investment opportunities
  • Evaluating potential transactions
  • Valuation monitoring
  • Management of the current portfolio
  • Establishing great lines of communication with limited partners (LPs)

However, none of this can be possible if the PE firm is not a partner with third-party vendors. They cannot be pure providers – they have to be clear partners with the managers to achieve the best operational practices. That requires trust and clear lines of communication.

A specific mindset should be developed – one that makes the administrator an extension of the manager’s team, as that helps reassure investors.

That’s crucial because investor standards are high in the current market, and you want to give them what they need. They need to see:

  • A sufficient level of expertise
  • A good ratio between cost and efficiency
  • A reassurance that you’re sending information to trusted outside parties

In essence, they want to see clear evidence that you are interactively involved with the service partners.

That’s also achieved not only by you but by the third party vendors as well. The key in the business model of Finance as a Service (FaaS) companies like Consero is transparency. Other FaaS firms and we are transparent when it comes to how we offer our service because we know that investors want to see the process if they are going to feel comfortable.

That’s why, once again, clear lines of communication are vital, as that’s the easiest way for investors to be reassured that everything is going in the way they want it to go.

Naturally, investors want to get the information they need in the format they are comfortable with.

Our finance experts are there to manage the entire finance & accounting function and provide the portfolio companies with month end financials and custom reports. We are responsible for the financial statements and all necessary communications with the investor if your portco does not have in-house financial leadership. What outsourcing achieves here is helping managers manage the finance function more efficiently and cost-effectively.

What are the key advantages of outsourcing?

There are three main advantages:

  • Finance & Accounting expertise
  • Real-time access to all financial data
  • Cost-efficiency

Most companies hiring the services of companies like Consero say that the level of expertise they get is unprecedented and is the most important advantage of outsourcing.

That goes in line with what all companies looking to outsource want to get in return for their money. They want to gain the services of an expert team that will help with the tasks they cannot complete on their own.

That expertise is complemented by the technology the company uses in the service they provide. That’s why we at Consero have ensured that our software is flexible and able to deliver everything that each specific client might need.

The upcoming trends in outsourcing within the PE space

Most companies believe in the prevalence of the following trends:

  • LP pressure
  • Regulatory compliance demands
  • Product complexity

Most feel that outsourcing will continue to rise in popularity. Some are even saying that they can barely market to investors unless they have a 3rd party finance & accounting administrator.

The huge LP demand will also continue to drive the funds to service partners. As we’ve already established, outsourcing gives managers the time they need to focus on the tasks they do best – finding great opportunities and delivering a superior product to the investors.

In the end, the rise in outsourcing popularity will continue in the US as well, and most believe that the percentages from PwC we mentioned in the beginning, are destined to rise. Outsourcing is no longer a luxury – it’s a necessity and investors demand it.

The impacts of ASC 606 and why private equity firms need to pay more attention

You have probably heard by now about the new revenue recognition standard that goes by the acronym ASC 606. If you have, you know its importance.

The importance stems from two things:

  1. It is a crucial accounting regulation
  2. It mostly affects public companies

2018 was the first year the ASC 606 was in effect, and its results are still not entirely clear to many, especially private equities who haven’t paid enough attention to it.

The primary goal of the regulation is to standardize revenue recognition for all industries. In essence, it aims to eliminate industry-specific accounting for revenues and introduce a specific five-step principle approach.

The core principle here is that companies need to identify revenue after the customer gains the goods or services, and do it in the amount the company expects to get in exchange for the products it provides. To make it more clear, this significantly changes when and to what extent companies identify revenue.

When it comes to private equity though, the implications of the regulation are much different and way more serious. We at Consero wanted to make sure that the private equity firms working with us, as well as those still not familiar with our services, to understand the vast implications the new standard has on their business.

Implementation of ASC 606 among private companies

Private companies are still showing slow progress with the implementation of the new regulation.

The problem with this lies in two things:

  1. Even though private companies had an extra year for the implementation, they had a more difficult task ahead. They are left out of many of the disclosure requirements the new standard poses, but they still have other disclosures, and then other compliance challenges afterward.
  2. Private companies are usually less prepared to deal with these types of compliance regulations than public companies.

It’s worth mentioning that the private companies that are nearing their initial public offerings can also cause problems for themselves without proper compliance with the new standard.

The software as a service model

When it comes to SaaS model, there are other problems as well. The pure-play cloud-subscription services can’t feel the full impact of the ASC 606, but term and perpetual licenses can. And as for hybrid subscriptions, they have the worst of it.

With 606, revenue in hybrid subscription models that base on term licenses needs to identify at once. That doesn’t mean that the whole business model needs to change, but it makes it a lot more complicated and filled with nuances which must share with investors. One of the solutions here is to fine-tune customer agreements.

In the end, the PE firms that have portfolios filled with such models, the lack of ASC 606 compliance can affect their exit strategies as there’s no way to point to reported recurring revenues clearly.

The impacts on the industry

Even the PE firms not dealing with technology firms need to care for the new standard as they too are affected. The tech sector is the most affected one, but the following areas are also affected:

  • Aerospace and defense
  • Manufacturing
  • Media and entertainment
  • Life sciences and pharmaceuticals
  • Transportation
  • Automotive
  • Telecommunications
  • Retail
  • And many more

All in all, industries that rely on customer contracts are vastly affected. However, other impacts are still not evident and cannot, as of yet, be anticipated.

When you take a look at the more broader effects, any organization that uses contracts with customers to transfer services or goods is affected.

The impact comes in the form of:

  • Revenue-recognition timing
  • Processes and internal controls that capture data in financial reporting
  • Required disclosures and necessary modifications to IT systems

Technology needs to enable implementation

It’s worth mentioning that the best way to approach the application of the new standard is through technology. However, the technology solution needs to be chosen after you have identified the right path for the strategic implementation of the new revenue recognition model.

Consero can help you here as we aim to step in and take the lead when the existing accounting leadership is not prepared or is not present in the company.

Our technology support and enable proper revenue recognition with three different options:

  1. Order entry
  2. Deferred revenue model
  3. Contracts module

Order entry

This option is used when there is a low volume of contracts, and it includes:

  • Amortization of revenue over the life of a contract
  • Separation of invoicing and revenue (quarterly invoicing with monthly revenue recognition for example)
  • Different delivery options for items with default settings within item setup
  • Links with projects

Deferred revenue model

This model is used when you have a relatively high number of contracts (that number should be below 150) and when you need to reallocate revenue across different products which can also have discounts.

The model:

  • Has a fully automated revenue allocation process
  • Can create a systematic approach to revenue reallocation
  • Provides a complete audit trail

Contracts module

The last option is the most complex one as it’s made for a much higher contract volume.

It can automate the most critical process you have – turning orders into cash. The module does that by:

  • Maximizing billing and collections
  • Automating revenue deferral and revenue recognition
  • Optimizing contract renewals

Its key features are:

  • The ability to automate revenue recognition and deferral. You can set up revenue recognition rules for different types of products and services to post revenue automatically.
  • It can automatically generate billing schedules from contractual billing rules and can consolidate multiple billing types into single bills.
  • It connects project accounting with revenue recognition, by using timesheets and completed milestones to automatically recognize revenue, while maintaining a separate billing schedule.
  • It has a pre-configured cloud connector that manages orders and transactions while automating revenue recognition based on bookings data.

It’s up to you to choose the technology option that suits your needs. Consero can make sure that you make the right choice, but the key for you is first to understand the impacts of the ASC 606 which we have previously discussed and then adopt the right technology.

Consero Global’s Inside the Portfolio Series

Consero Global’s Inside the Portfolio Series: How Gimmal found a new gear

Gimmal’s private equity backers saw the potential for the records management company to transition from services to software, but first, Gimmal had to ensure the finance function could handle the reporting and other tasks required of a portfolio company.

Private equity’s biggest successes are often rooted in substantial transformations of a portfolio company, not just improving operations, but moving into new sectors and products. In the case of Gimmal, its private equity investor realized it could move this successful records management company from services into software.

First, the private equity firm appointed a new CEO, Mark Johnson. Johnson understood the time, resources and focus required to orchestrate the shift into software, but there were more pressing issues. Gimmal needed to upgrade their finance function to handle the new reporting requirements for their private equity investors. The current staff simply didn’t have the training or tools to meet the new standards.

Gimmal’s CEO Mark Johnson considered re-staffing the finance team with folks with the correct skills and capabilities, but that could take 18 months, which is a lifetime during the span of a private equity ownership period. Furthermore, it could distract the finance team from the more strategic tasks that would ensure that transformation was a success.

Johnson looked for another route and discovered what Consero could do. He was impressed with Consero’s Finance-as-a-Service model that offered the necessary tools and teams to manage their financial solution in only 30 to 90 days. Better yet, Johnson could vet the quality of Consero’s software and talent as they began to support the current in-house controller and CFO.

Consero allowed Gimmal to plug into their top tier software solutions. These included Sage Intacct for general ledger purposes, Nexonia for time-keeping, Bill.com for AP automation, and finally Consero’s SIMPL console which consolidated all this software into a single elegant interface with integrated reporting. That console also allows senior executives at Gimmal to get real time reporting.

“Consero quickly built the reports and systems we were lacking, allowing me to focus my efforts where they need to be,” said Johnson. As the CEO of any private equity portfolio company will know, most PE firms have ambitious plans for the first 100 days of the investment, and they rarely include getting the basics of financial reporting in order.

Gimmal’s books were so buttoned up already that Consero was able to swiftly leverage its software and in-house talent to get the Company up to speed, and in a place where Johnson could focus on meeting his PE investor’s expectations on bigger strategic initiatives.

Johnson found that Consero also added value well beyond those basics. “It’s not just a back-office relationship; it reaches across the entire business,” says Johnson. And that means Consero can play a key role in Gimmal’s shift from services to software.

Gimmal’s project managers interact with Consero to launch new projects on a regular basis, with time tracking and bill approvals, and Consero’s Financial Planning & Services (FP&A) team work with Gimmal’s Sales & Marketing people to gather budget and forecast reports.

This contribution allowed Gimmal to scale up its quality and capacity quickly to meet the new demands of the private equity owner. PE shops aren’t always patient with smaller, less mature enterprises, so this can help fortify the relationship between the private equity firm and portfolio company.

For example, after implementing Consero’s transparent SIMPL console, Johnson explains, “There’s no month-to-month fluctuation in terms of accruals or accrual reversals. Everything is reliable.” And this allows him to keep investors in the loop with a consistency that private equity firms appreciate.

Consero’s contribution also made the finance function far more predictable, with books closed on the tenth day of every month, and bills paid every Friday. And by meeting the standardized reporting requirements of private equity, a change in ownership doesn’t mean starting from scratch with regards to these processes all over again. The system in place can now work for the new owners and Consero’s variable pricing model allows them to grow right alongside Gimmal.

And all this was done for a price 25% lower than if Johnson had staffed up internally. Furthermore, like the best outsourcing solutions, the staff at Consero really works as an extension of Gimmal’s in-house team, working closely with them on a regular basis. It becomes a collaboration, with room for growth and improvement for the teams at both Gimmal and Consero. As Gimmal’s finance team gets more sophisticated in processes, Consero learns how to better serve the company.

Nowadays, LPs have outsized expectations for their private equity investments and that means that portfolio companies like Gimmal need to do more than upgrade operations, they have to radically improve the enterprise and deliver growth.

And a service provider like Consero can play a role in revitalizing the finance function with both speed and rigor, so companies like Gimmal can focus on reinventing themselves for an exit that exceeds expectations.

What should private equity firms do if their portfolio companies are always late in providing financials?

In our cooperation with many private equity firms, we’ve realized one thing – they all have very similar problems with their portfolio companies.

 

It is especially true when it comes to the finances and accounting of these portfolio companies. Most of the problems facing these companies lie precisely in the F&A departments.

Private equity firms usually struggle to get finance and accounting in most of their new portfolio companies to a specific point when they can produce:

  • Accurate,
  • Timely, and
  • Audit-ready financial information

What’s more, all of this needs to be done cost-effectively.

So, if your company is a private equity firm that has similar issues, how do you get your portfolio companies to provide timely financials?

Before we explain our solution, we need to take a better look at the challenges and problems that companies face, all of which are preventing them from providing proper financials.

The common challenges and adverse results in portfolio companies

Many problems exist for portfolio companies, but they all boil down to three main ones:

  1. The wrong personnel – it implies that the staff you have in the F&A departments of the portfolio company do not have the required skill set. Their abilities and knowledge don’t usually align with the tasks that are required of them. The companies thus have to make do with what they have, as they typically don’t have a better solution.
  2. Poorly performed processes – these usually stem from the fact that the accounting and finance systems of the portfolio company have many limitations, and the procedures themselves are undefined. That leads to any effort of improving the finance and accounting of the firm to be unsuccessful.
  3. Disconnected data – financial data and the systems dealing with it are dispersed and siloed in the company, which provides questionable numbers.

These common problems lead to equally common and quite unfavorable results for the portfolio company, and in turn, for the private equity firm as well:

  • Less visibility – all the information that’s not integrated well enough is inadequate, and executives cannot make proper and confident decisions.
  • Wasted time – all the problems we explained, lead to time wasted, because the personnel needs to focus more on the everyday operational matters like transactions and reporting, and not have enough time left to focus on the more critical areas like customers and growth of the company.
  • Lack of scalability – the problems in the finance and accounting departments result in one of the most significant challenges a private equity firm can have within a portfolio company – the existence of bottlenecks that hinder overall growth.

As you can see, these seemingly small inadequacies and problems that commonly occur in F&A departments of portfolio companies often result in some very negative metrics.

Poor metrics can only show that the portfolio company is not growing and improving in the way the private equity firm wants, which can only mean that their investment is going to waste.

So, what is the solution here?

Top quality finance services meant for investors – the Finance as a Service solution

A Finance as a Service firm is a company that offers financial services to private equity firms and many other types of companies.

The solution they offer is a unique and fast way to improve the operational profitability of the portfolio companies PE firms have. Also, they can also enhance the decision making of the CEOs, CFOs, and other executives by increasing their visibility into the financial performance of the portfolio company.

That all sounds well, but how does it work in practice?

The Consero solution

We at Consero offer a unique solution that in practice works like a well-oiled machine and can provide unprecedented levels of improvement in the financial aspect of a portfolio company.

We do this through a combination of:

  • Modern and innovative software automation tools
  • Improved workflow
  • Experienced and highly trained F&A professionals

All of this can transform your portfolio company and its finance functions into machines that work to support your company’s daily financial operations effectively but also your strategic decision-making process, all the while significantly reducing many expenses you usually have when doing these things yourself or having in-house teams to do them for you.

Consero’s solution is a mutually supportive system of:

  • Efficient processes
  • Technological innovations
  • Highly trained finance experts

We use the best methods and controls in the industry, all of which have been improved and refined over the years and through our cooperation with more than 250 clients that have faced the same problems you do.

Our technological innovations include well-designed software solutions made by veterans in the industry. Our software solution is:

  • Integrated into your company
  • Highly modifiable and configurable
  • Enables rapid deployment and consistent execution

The people we have in our teams boast a highly comprehensive skill set and can perform all the necessary F&A functions in your portfolio company.

Our solution provides efficiently delivered results, transparent reporting, scalable architecture, and most importantly – timely financials.

In the end, the Consero solution is more cost-effective than in-house teams.

  • Instead of hiring each member of your in-house F&A team, your hire Consero.
  • Instead of paying them to do the research and architect systems, or refining purchased networks, you get our highly configurable ones.
  • Instead of integrating people and training them to use the systems, you get us to do it for you. We present it all in a way that can be of assistance to the company’s CEO, CFO, and executives.
  • Instead of having an in-house team that takes nine to 18 months to optimize finance and accounting of the portfolio company, you get the Consero solution that integrates with your company within one to two months.

Mainly, when you compare the Consero solution to in-house teams, you realize that Consero does everything more effectively, in a dramatically shorter timeline and for half of the cost.

The results of this are executives, CEOs, and CFOs who make better-informed decisions, the portfolio company becomes more streamlined and more scalable, and the expenses are lowered – not to mention the portfolio company now provides timely financials.

Why does private equity often fail at hiring the right CFOs?

First of all, we have to start by saying that this is a very hot topic right now. Many people want to be Chief Financial Officers or CFOs in companies, but the role is indeed not an easy one, nor are many people suited for it.

 

The CFO role is also entering an era of significant changes for this title, making the job even harder than it already is.

Consero has met and worked with many private equity firms, and many of them have told us that hiring a CFO is one of the most problematic tasks a company can have. They also believe that the role of CFO is one of the toughest ones to fill within any organization.

Unfortunately, private equity firms aren’t the only companies that feel this way, even CEOs of many  companies believe this to be the case. A lot of that has to do with the fact that within a CFOs job there’s a myriad of tasks that have to exist and eventually be completed. Many of these tasks can be quite operational in their nature, like the following ones:

  • Making sure that an accounting department is a well-oiled machine,
  • Ensuring that the company passes every audit,
  • Finding out if the firm has the right systems in place to scale,
  • Taking a good look at the entire team and determining if every team member is right for the job they have,
  • Ensuring that the business has the proper AP process,
  • Making sure that the finance and accounting teams are closing all the books on time.

As you can see, these are already quite daunting tasks, and there are many more like them. They are all, naturally, mandatory, but that’s not the end of it all. The aspect that follows is more vital for the role than this one.

The strategic aspect of the job

The operational tasks that have to be done are already tricky and time-consuming, but then there’s also the vital aspect of the CFO role that also has to be accomplished. The strategic part is much more critical because the main thing here is that the CFO has to be the right hand to the CEO.

Many private equity firms are afraid of what would ensue if something were to happen to the CEO. Their main plan there is for the CFO to step in and temporarily do the CEOs job. For that, they are expecting the CFO to be ready to jump in and successfully do that job as well.

Private equity firms want CFOs to:

  • Understand how to grow the company
  • Look for strategic M&A
  • Use all the metrics to drive the growth of their company

To achieve all of that, the CFO has to know how to take over the job of the CEO which is why they need to be utterly effective at being the CEO’s right hand.

What do others think?

Scott Donaldson with CIC Partners (and former Partner at Austin Ventures) has told us that when he looks at his career; he doesn’t have a high batting average on hiring CFOs. Now that he’s had a chance to take a step back, some of the things that he says is that there are either one or two things that can happen when hiring a CFO:

  • The CFO you hire really isn’t a strategic person and doesn’t have that strategic awareness that’s needed for the job.
  • The CFO is so invested in the details that they can’t be strategic even if they know how to.

From what can be seen here, in many cases, strategy lacks in the role of the CFO. As we’ve already determined and as most of you already know, the strategic aspect of the CFO’s job is the most crucial aspect of this job, or at least it’s starting to be.

How can Consero help here?

Within Consero’s Finance as a Service model, what we do for you is the following:

  • We take over the basic blocking and tackling that the CFOs usually have to do themselves.
  • We enable you to hire a CFO who can oversee the accounting department.
  • The CFO doesn’t have to go into the little details anymore, which often go as far as knowing what the best AP workflow is, or how to implement the best GL tool for the company.

Consero offers a completely managed financial solution. We will take care of all of those operational tasks that the CFO usually does and they will thus be able to entirely focus on all of those more strategic aspects of the business that is now far more critical than anything else in the role.

What we do gives companies a greater level of financial control and insight which benefits the CFO significantly. What’s more, by enabling the CFO to focus on what matters, we will allow him or her to be more successful because the strategic traits are what truly excite most private equity firms today.

The ability of strategic thinking is what makes private equity firms feel that once they sell the company, they should still hire the same CFO for the same role in another company they acquire. That’s how much importance they place on strategic thinking within the CFO role.

Most private equity firms believe that such CFOs:

  • Are able to find great M&A opportunities
  • Can understand the business model of the company at a deeper level
  • Know where to invest and where not to spend

These are the abilities and traits that truly impress private equity firms, and we can enable the CFO to have them because with our model your CFO doesn’t have to do anything other than general oversight of the finance function and crucial strategic tasks.

You can seek for a person who can do both the tactical and strategic tasks. But it is very rare to find that unicorn. You will end up with a CFO who is comfortable with the tactical but isn’t truly strategic. Or, you will end up with a strategic CFO who is too mired in the day-to-day finance and accounting activities that they don’t have time to be strategic. When those less crucial tasks hinder growth, you can rest assured that Consero will do them for you.

Top 5 reasons why private equity firms use Finance as a Service (FaaS)

Finance as a service (FaaS) brings many benefits to all types of companies. Private equity firms know that they need to leverage the best tools and services to help their portfolios excel, which is why they often recommend Consero.

 

We at Consero have found out from our numerous dealings with private equity firms that there are a few key characteristics that we possess which make clients stay with us, or others to hire us.

There are several reasons that our private equity partners continue to collaborate with us and include us in their playbook, the most notable are:

  • Speed to optimization
  • Improved reporting and data
  • Many private equity firms consider us to be CFO insurance
  • Better scalability
  • 30% to 40% overall cost savings

Let’s get into more details on each of the reasons to adequately show you why private equity firms tend to use FaaS.

1.    Speed to optimization

When private equity firms invest in a company, the first and most crucial thing they try to do is grow that company as fast as possible.

After these acquisitions occur, it’s often the case that the accounting and finance department starts to hinder that growth. But why does that happen?

There can be many reasons for this. For example:

  • The departments don’t have the right systems in place or processes that will help them achieve this growth for the company.
  • They are unable to increase the revenues of the company.
  • The finance team members don’t have the right skill set.

The same problems can occur in all industries, including: softwareprofessional services and eCommerce, the healthcare industry and more. When there is a problem in the finance department, we’ve found that what most companies tend to do usually follow the same steps:

1. They hire a team.
2. The team researches systems and they select one that fits best.
3. Then they configure that same system and perform its complete implementation.
4. After all of that is done, they have to train all the users for that system.

It’s fairly apparent that this can take very long to achieve. Most companies need from 18 to 24 months to optimize the finance and accounting function. Another problem here is that all their energy is spent on trying to optimize everything and get to that point of full implementation, while they still have to keep up with the management of the day to day operations.

With the Finance as a Service model, you get optimized in only 30 to 60 days. That means that we’ll have all the accounting systems and processes fully implemented and we can deploy them more rapidly and cost-effectively than an in-house team ever could.

When you’re in private equity, time is money, so the faster you can get this up and running and optimized, the faster the company can grow, and the quicker you can acquire other companies as well.

2.    Improved reporting and data

Enhanced reporting and data are critical for private equity firms. In many cases when they invest in a company, it happens that the company has an accounting manager or controller but does not have a strategic CFO. As a result, their reporting is rarely up to the sophisticated level the private equity firms want.

Private equity firms use data, metrics, and analytics to drive the growth of the company they acquire. They also understand what’s really going on with companies and what motivates them. For those reasons, they can adequately build and improve the company. If they don’t have all the requirements necessary to achieve this, they are unable to view the data they need to make the best decisions that will move the company towards growth.

With Consero, you avoid the lack of these metrics and analytics that private equity firms need because our model already allows for better reporting and data, giving you the necessary metrics and KPIs in an easy-to-read format.

3.    CFO insurance

We’ve found through time that many private equity firms consider Consero’s Finance as a Service model as CFO insurance. That’s the case because we:

  • Take over the day to day mundane tasks.
  • Reduce the time needed with administration and financial analysis.

With all of that and much more taken care of, the CFO can focus on the more important things like the strategic aspects of the job and the growth of the business.

All in all, we enable the CFO to be the right hand to the CEO and not spend time on routine and tactical things but rather on investigating things like how to turn management information into real competitive intelligence. For all of that, we truly are CFO insurance for private equity firms.

4.    Better scalability

Our model allows companies to be scalable. We can give a company the right level of resource for the right task, and we can grow in increments of half of a person, for example.

Precisely because we are appropriately structured, when a company goes through an acquisition, we have enough resources that can quickly jump in and help with acquisition integration by:

  • Setting up the right systems,
  • Getting that company streamlined and on the same process,
  • All the while we’re not distracting the day to day accounting team.

That allows us to be far more scalable than in-house teams. After you go through with an acquisition, your existing accounting teams have to work to get that acquisition integrated. What we’ve seen is that in many cases, that just doesn’t happen because they don’t have the time to get that done.

5.    30% to 40% overall cost savings

Another reason private equity firms work with Consero is that we are more cost effective than having an in-house team.

Besides that, we’ve also seen that these savings can last indefinitely, even as companies continue to grow. That has to do a lot with:

  • Our bigger labor pool of finance experts.
  • The fact that we work with companies that are the same as yours, so we’ve already figured out the best process for you.
  • We are very efficient at what we do.
  • We automate a lot more manual activities.

All in all, these are the five main reasons why we firmly believe private equity firms continue to partner with us and why our service is much better than what any in-house team can offer.

5 Metrics that private equity investors want

 

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Investment is a serious business that requires a lot of money. Private equity firms are ready to invest vast amounts of money in a company, but they also expect to pay for something that’s going to bring higher revenues in the future and eventually enable them to sell the company.

That’s precisely why their decisions are driven by the numbers, which is why they have a few key metrics they want to see:

  1. Liquidity
  2. Cash flow
  3. Expense control
  4. Analysis of each product
  5. Industry related metrics

Before we go into greater detail on each one, there are few other important things you should be aware of.

The first thing that most investment companies do when they invest in or purchase a company is to improve further and develop the company’s information systems. They do that to ensure that two key things are up to their standards:

  • The costs – what they are and where they are. If everything is according to their set of rules, nothing changes. However, if the costs can reduce, you can be sure that they will do everything they can to achieve this. Private equities only want their investments to pan out, which is inherently suitable for both the private equity investor and the company in which they invested.
  • Which products and services are selling – this again is tied to the revenues of the company. Whatever product or service the company has that is creating incomes for them, will remain the same or improved. However, this is not always the case. The private equity firm will want to cut down on costs like we already mentioned, and one of the ways to do that will be to eliminate the products or services that are not producing high-enough revenues.

All of this will enable the investor to increase the worth of their investment and eventually sell the company to another, larger buyer and make a profit.

Before the investor buys a company, they want to find out about the five main metrics we previously mentioned, so let’s dig into each one and explain in more detail.

1. Liquidity

The company’s liquidity measures to how quickly it can be bought or sold without affecting its price are the reason why liquidity matters to an investor are clear.

A controller, CFO, or a bookkeeper, would typically be responsible for this metric, although it is not looked into with such a degree the investor would want. That’s why liquidity usually becomes an issue after the company is sold or invested in. When that happens, the private equity firm wants regular cash flow models for specific time periods:

  • Daily – if there is a crisis at the moment,
  • Weekly,
  • Monthly,
  • Or quarterly.

It further necessitates the need for top-notch accounting solutions because the company needs to make sure that the liquidity metrics remain at the desirable levels or change to something the investor wants.

2. Cash flow

Income matters and the investors know that. No one wants to invest in or own a company that’s not making enough money. However, even though the investors care for it, they care more about the cash flow.

The reason behind this is apparent. Income statements include non-cash revenues and expenses, while the cash flow statements clearly show how much cash the company is generating. This single metric matters a lot to investors as high incomes sometimes do not necessarily mean that the money is flowing.

Now, investors value companies on EBITDA, which is the leading indicator of a company’s financial performance and their earnings potential. It’s an acronym, and it includes:

  • Earnings Before Interest,
  • Taxes,
  • Depreciation, and
  • Amortization.

All in all, not all values are equal to investors, and increased EBITDA is what’s going to enable the investor to sell the company later for a lot more than the amount they invested.

3. Expense control

Investors always pore over expenses, which is why spending controls are another crucial metric they want to know about.

This metric is used to identify and reduce the expenses a company has, which in turn increases profits. It starts with the budgeting process where real results compare against the budgeted expectations. If it happens that the costs are higher than they were previously planned to be, action has to be taken to lower them.

That’s why investors always ask about:

  • The company’s policies
  • Why specific expenses are spiking
  • How these expenses are controlled

4. Analysis of each product

Cost accounting is often tricky, even for larger companies, as sometimes it’s easy to omit certain areas where profits are made, and cash is generated. That’s why costs need to be controlled in the best way possible.

When things are omitted, investors always want to do a thorough analysis of each product, to see the actual margins for each specific product their target company is making.

When it comes to businesses offering services instead of products, the private equity investors look into how contracts are bid, and they want to avoid deals that aren’t profitable enough, even though they increase revenues.

5. Industry related metrics

The fifth and last metric is hard to explain as it’s different for each company, depending on what business they are in. Every industry has its key metrics, which is why each company needs to define them and research into the parameters used by other companies in their industry.

The private equity firm will undoubtedly want to check these metrics as they help them gain insight into how the company is performing within its industry, not just how it’s fairing overall.

These five metrics are the backbone of the way private equity firms see investment targets. That means that every company looking to attract investors’ needs to worry about them and work on improving them and eventually presenting them in the best possible light to the investors.

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