According to PitchBook’s Q3 2024 Global M&A Report, private equity is beginning to catch up to the global acceleration of M&A activity. Emerging from a prolonged period of muted activity, CFOs in-seat at PE-backed companies need to be ready for a looming exit.
Tom Pierce, Managing Director of Consero’s CFO Advisory Services, and Jason Adams, Principal at BV Investment Partners, an investor in Consero, recently joined the Association for Corporate Growth (ACG) Middle Market Growth Conversations podcast to offer guidance on how CFOs can add value during a private equity-backed exit process while balancing with the role’s expanded scope.
Why the CFO role has evolved
With years of experience as a CFO across multiple firms, Pierce brings a firsthand perspective on how the CFO role has evolved over time.
Adams, with his extensive background in private equity, offers a distinct view on the changing responsibilities of the CFO within investor-backed companies.
Together, they provide a comprehensive understanding of the CFO’s evolving role at PE-backed firms. They observed several catalysts for the expanded scope of work for CFOs over the years.
Transformation through digitalization
The proliferation of cloud-based platforms like NetSuite, Workday, Intacct, and SIMPL has fundamentally transformed finance function capabilities at mid-market, PE-backed companies.
With these technologies enabling real-time data access, streamlined financial processes, and enhanced transparency and efficiency, the CFO’s role has shifted from data gathering to strategic analysis.
Increased private equity influence
Private equity ownership in the mid-market has also grown as much as 300%, according to some estimates, bringing a more metrics-driven approach.
CFOs are now responsible for providing timely, actionable insights and leading financial reporting to align with the financially intensive demands of private equity firms.
Higher PE valuations
Valuations in private equity deals have also risen in lockstep with increased competition. With fewer opportunities to apply the classic playbook of “buying low, selling high,” private equity funds have turned to the CFOs of their portfolio companies to drive EBITDA growth and generate greater returns.
“Private equity funds have had to figure out how to generate returns besides buying low and selling high.”
-Jason Adams, Principal, BV Investment Partners
The rise of add-on acquisitions
Add-on acquisitions have grown in popularity as a vehicle to drive EBITDA growth. A higher volume of add-ons has meant more dependence on the CFO in a private equity-backed situation to:
- Find and execute the deals along with the PE fund
- Integrate those businesses post-acquisition
While this creates more value over the hold period, the rise of add-on acquisitions has also meant more effort and focus from the CFO.
How CFOs act as key drivers of exit value
The exit process is long and difficult between gathering data and meeting with prospective buyers. Pierce and Adams highlight the areas where investor-backed CFOs can drive the most value on behalf of their firms and PE sponsors.
Instilling confidence with buyers
CFOs are critical for gathering the data and information buyers request, but their true value is the skill with which they present the business, its trends, and KPIs to potential buyers.
As Adams notes, from the private equity buyer’s perspective, when “the CFO is able to speak fluently and in-depth about the business, it gives buyers potential comfort that they’re buying a high-quality business with talented individuals.”
Pre-exit preparation
Much of the CFO’s added value in an exit process should occur far in advance of the actual exit.
For example, before a PE sponsor is looking to sell the company, CFOs should have already built:
- Customer databases
- Clear and simple financial reporting packages, with enough detail for what the business needs
When the sales process inevitably arrives, CFOs who have made exit readiness a day-one priority can quickly turnover and present the story of the business to buyers, further instilling confidence in a well-run operation.
Managing day-to-day vs. strategic exit planning
While a transaction should be the CFO’s end goal, it could be years away. Finding the time to incorporate exit readiness into an already-full plate can be a challenge.
Pierce and Adams share advice on how to prioritize exit planning while balancing daily management of financial operations.
Balancing routine operations with exit readiness
For investor-backed CFOs, a sale process is inevitable. Financial leaders need the bandwidth to focus on their highest value responsibility: maximizing their firm’s valuation.
Key responsibilities like financial reporting, KPI monitoring, and risk management can’t be neglected, so CFOs need well-established people, processes, and systems in their finance and accounting (F&A) function.
However, most PE-backed firms have challenges with at least one of those pillars, which is where Pierce and Adams recommend outsourcing finance functions to support operational efficiency and strategic exit preparation.
Outsourcing to maintain focus
Many PE-backed CFOs are overly drawn into non-core functions due to a national shortage of F&A professionals.
Adams sees a lot of CFOs at portfolio companies doing tasks that could be done by someone else on their team due to an inability to hire the right people.
Outsourcing F&A functions frees up bandwidth for high-value tasks related to exit readiness:
- Bookkeeping support
- Financial planning & analysis (FP&A)
- Technology providers
Proactive steps for CFOs in exit planning
With their combined experience, Pierce and Adams provide several action steps CFOs can take right now to prepare for a successful exit.
1. Think of outsourced resources as investments
Adams sees a growing trend of buyers proactively approaching acquisition targets earlier. Given that the sale process can happen at any time, CFOs should be comfortable spending on additional team members and resources to ensure readiness.
“I encourage our CFOs to think about those hires as investments. Think about the ROIC on that support,” says Adams, because certainly they will pay dividends in the long term.
More investor-backed CFOs are turning to third parties for M&A support as well. Consero’s research found that 53% of investor-backed CFOs utilize a F&A partner for these transactions.
2. Establish clear exit timelines with the CEO
As a next step, Pierce recommends CFOs work with their CEO to define a target exit date, allowing the team to work backward and address essential tasks for a successful exit plan.
This approach encourages early preparation and reduces the likelihood of last-minute obstacles.
3. Organize key financial information and contracts
CFOs should maintain an organized database of customer contracts, clean financial records, and conduct quality-of-earnings analyses.
These preparations simplify the exit process, improve valuation transparency, and ensure financials are “buyer-ready”.
4. Build relationships with investment bankers early
CFOs can gain insights into current exit process requirements and timelines by engaging with investment bankers well before the sale.
These conversations help inform CFOs on preparation steps specific to current market expectations, positioning the company favorably in the sale.
Best practices for private equity CFOs in exits
The exit process can make or break a CFO’s reputation. Pierce and Adams share what separates rockstar CFOs from average ones in successful exits.
- Mastering business Narratives and Key Drivers
Top-performing CFOs continuously refine their ability to explain business trends and key performance indicators (KPIs), which enhances their exit readiness.
Focusing on a small set of core value drivers, rather than numerous KPIs, makes communication with potential buyers more impactful.
- Fostering long-term value creation with strategic focus
Clear communication and prioritization from private equity sponsors guide CFOs in long-term value generation.
PE firms should support CFOs in building a robust finance function, whether through outsourcing or hiring, to ensure the team is well-equipped for the demands of exit readiness.
Create tomorrow’s exit value today
The CFO’s primary responsibility is maximizing shareholder value and leading their company to a successful exit. Given the complexity of exits, and the unpredictability of the process, outsourcing the finance and accounting function will help the CFO stay focused on high leverage activities in successful exits: aligning financial rigor with a clear roadmap, instilling confidence within buyers, and ensuring the business is well-positioned for a seamless transition to new ownership.
This is part two in a three-part series on Exit Readiness. Stay tuned for Part 3. Read our coverage on part one of our conversation on Exit Readiness here and listen here.
