The carve-out conundrum: Effective steps to fast track the finance & accounting function

When a private equity firm carves out a business unit from its parent company, they’re left having to build a new infrastructure for that stand-alone entity. Bill Klein, President and Co-Founder of Consero Global discusses effective steps to fast track the building of a finance team for the new business.

Corporate carve-outs might be a popular acquisition tactic for private equity groups, but that’s not because they’re easy. Whatever the potential upside, GPs will need to build all the functional teams that the parent company provided, all while trying to execute on the strategic improvements that were the rationale for buying the business in the first place. And given the private equity lifecycle, time is of the essence.

And of the various functional teams to be assembled, GPs know that the accounting and finance department is vital, but often they underestimate how hard it is to get the right people, systems and procedures in place. This is why Bill Klein of Consero argues that a finance-as-service model might be the best way to meet the needs of a carve-out investment.

Whether the GP is carving out a single business line or several business units from a parent company, they face the same dilemma. “GPs negotiate terms for the carve-out company to be reliant on the parent company’s systems, software and staff for their finance function when the deal is done,” says Klein. “They can’t begin building that finance department prior to close, for fear of eating those costs if the deal falls through.”

So, on day one, the GP faces the prospect of having the carve-out company build a finance and accounting function from scratch. Klein explains: “The Oracle system the unit is currently using probably doesn’t make sense for the stand-alone business, and since most large corporations centralize such functions, the carve-out is left without staff or software to handle it.”

The high cost of starting from scratch

Normally, the GP will negotiate terms for the parent company to continue to provide the finance department, but there are a number of downsides to this arrangement. “The carve-out is left paying a fee for these functions as their CFO or finance lead scrambles to choose systems and hire their own staff,” says Klein. “But it’s safe to say that spun out business unit will never take priority over a current unit when the accounting staff is pressed for time, and these departments aren’t built for customer service, so there can be communication snafus and delays in getting answers.”

As these hiccups arrive, the carve-out business still needs to find the best way to build that finance department from scratch. “Private equity firms know how important it is to get the finance function up and running, but it’s not among their strategic priorities. It’s another task to be done on that very long checklist after the deal is signed.”

But there are real costs to underestimating the time and skill necessary to create a finance function. “No talented CFO wants to focus on the basic tactics of a finance department, the aggregating and reporting of financial data. The longer it takes to get the department up and running, the longer it takes for that CFO to make a strategic contribution to the company.”

If the carve-out CFO is starting from scratch, building the finance team involves a lot of unforeseen roadblocks. They are going to have to tackle five key steps, and each have their own hurdles:

  1. Recruit and hire people
  2. Research and architect systems
  3. Map the processes to the system (this could be far harder than choosing a system, since a system’s capabilities might not instantly fit with the exact process needs of the business)
  4. Integrate and train users on that system
  5. Configure the system, move the data and test it

The strategic value of starting with a partner

This is where a service provider like Consero can make a real difference. They allow the carved-out business to plug directly into their outsourced finance department. This means they get to skip right to the final step of that 5-step process. “We tend to get a department up and running within thirty to sixty days, while building a finance function from the ground up can take nine to eighteen months,” says Klein.

As the deal team negotiates the terms of the carve-out, Consero can make an initial assessment of the project. “Prior to close, there are limits on the information we can access, but we take a high-level view of the business, focusing on discovering its revenue model and financial structure,” says Klein. “Once we know that, we have 80% of what we need to get started because we’ve so much experience doing this.” Contrast that with a controller that’s hired during a traditional build-out, who might have built a finance department a few times, if at all.

This isn’t to say that Consero relies on a one-size-fits-all model. “There are policies and processes unique to the business which we can tailor our systems to do, but if the accounts payable department is truly “unique” then something’s very wrong,” says Klein. “There’s no need to reinvent the wheel each and every time.”

And Consero’s institutional knowledge helps them design short cuts and best practices for fast tracking the introduction of finance teams to clients. “For example, we make a list of critical vendors, who, if aren’t paid, would cut off services or supplies critical to the business,” says Klein. “In the wake of a deal closing, invoices can get lost in the shuffle, but with this list, we know what vendors to pay, even if the bill didn’t reach the right person.”

This speed and expertise allows the GP to focus on what they do best: create value at the newly independent company through a series of strategic initiatives. But the best laid plans have little chance to succeed if the financial data they’re based on is wrong or slow to arrive. And every GP knows it’s not the plan, but the execution that drives returns.

Consero FaaS: Disrupting the Outdated Traditional F&A Model

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

Build it Yourself Solution

  • CFO / Interim CFO
  • Consultants / VARs

Consero FaaS Solution

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

Build it Yourself Solution

  • CFO
  • Controllers & Accounting Team
  • Enterprise Accounting Applications

Consero FaaS Solution

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

New PE Platform Investment F&A Challenges

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