Consulting Chief Financial Officers (CFOs) play an important role at private equity (PE) portfolio companies. An interim CFO can be strategically added to a company’s team to navigate a merger or acquisition, implement new systems, or serve as a critical stop gap between incoming and outgoing CFOs.
According to a 2019 survey by Deloitte, the turnover rate for PE CFOs is greater than 80 percent, and finding a permanent CFO for a PE-backed company takes a lot of time and consideration.
Mid to large-sized businesses may already have a CFO, but what do they do if their business is going through a financial crunch? What if the CFO isn’t skilled enough to help you navigate the rough waters? Worst of all, what if the CFO gives notice during a rough season? It’s simple: you can hire an interim CFO or a part-time CFO (also known as fractional CFO), but first, you need to understand the difference between the two.
To avoid rushing the decision, a lot of private equity firms will hire a temporary or “interim CFO” who can come in and handle immediate needs. Of course, choosing an interim CFO is also an important decision, so it is wise to understand the unique circumstances under which an temporary CFO is engaged.
An interim CFO is brought in to a PE-backed company for a short period of time, typically one to three months. This means the temporary CFO has to hit the ground running when introduced to the PE-backed company. The ability to quickly adapt to business needs and tasks is an essential capability every temporary CFO should have.
Adaptability does not just come into play for completing work tasks, either. An interim CFO’s ability to adjust to a new setting can also be very useful when it comes to addressing company culture. The temporary CFO should be able to seamlessly adapt to working with various departments within the PE-backed company as well as understand best practices for interacting with the private equity board.
A key component of adaptability is interpersonal skills. Being able to effectively lead, communicate, and motivate team members is part of what makes an interim CFO successful. An interim CFO with a positive attitude and effective communication can integrate into an existing team a lot faster than someone who lacks the necessary interpersonal skills. Demonstrating effective communication also lends credibility to the temporary CFO’s ability to perform well for the new team.
Private equity leadership also benefits from an interim CFO’s interpersonal skills. Clear communication allows the interim CFO to interpret financial data in a clear, concise manner that will result in constructive interactions when reviewing financials.
One big mistake of many private equity firms when hiring an interim CFO for a portfolio company is looking for someone who has the same skill set as a full-time CFO. A temporary CFO should be hired to complete three main tasks or goals, and the skill set of this CFO will be dependent on the specific tasks that the PE-backed company needs completed. For instance, the company may need help with ERP system implementation or company restructuring. Often, an interim CFO is hired to fill the gap between the departure of the previous CFO and create a soft landing for the start date of the new CFO.
Since an interim CFO typically only stays with a company up to three months, it is easy for the CFO to remain objective and avoid office politics. A neutral point of view regarding company processes and procedures is incredibly valuable. This objective viewpoint can clearly see which areas can use improvement and where cuts need to be made. An interim CFO should be able to identify areas for financial improvement as well as major investment within the PE portfolio company. Even when the feedback is negative, an interim CFO should have the confidence and impartiality to honestly assess and comment on the state of the portfolio company.
Consulting CFOs might not have the same type of experience as the permanent CFO you seek, but they still have a high level of expertise, usually in a consulting capacity. Ideally, the temporary CFO will have an MBA in finance as well as five to 10 years of executive-level experience. A promising temporary CFO will also be able to demonstrate past experience leading financial or accounting functions of sizable companies. An interim CFO might not need to have the same experience as a permanent CFO, but they should still be an extremely competent professional familiar with the financial reporting and performance demands of private equity.
The right interim CFO for your portfolio company can make a huge difference in a short amount of time. Whether you need someone to help during a business acquisition, to implement new systems management procedures, or to just temporarily fill the gap between permanent CFOs, an interim CFO is a good investment for your private equity backed company.