Ownership Issues


As Seen in CFO Studio Magazine Q3 2016 Issue


In general, being a CFO is a lot harder than it used to be,” says Howard Reba, Finance Director – Portfolio Operations at Marlin Operations Group, Inc., an exclusive consulting firm affiliated with Marlin Management Company, LLC, based in Hermosa Beach, CA. “CFOs today have their hands in so many things that used to be relegated to other people, and over time, the job has become much more complicated.” And this holds especially true, he points out, for the CFO of a company that is owned by a private equity firm.

Mr. Reba spoke on The Private Equity CFO —Challenges and Opportunities, at a Small Market and Emerging Growth Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Roots Steakhouse in Morristown, NJ.

He began the discussion by asking the attendees what they felt were some of the different challenges the CFO at a private-equity-backed company faces. By an overwhelming margin, the response was the “virtually insatiable demand for information and insight” from the private equity group (PEG), he reports.

Attendees questioned what PEGs do with that high volume of facts and figures, and were surprised by the simplicity of his answer: “PEGs use the information they receive from their portfolio company CFOs to make decisions and pull different levers, much the same as any company does.” The group seemed to be hoping for a more complex explanation, so Mr. Reba added, “[A PEG] can only pull the same levers any company can, though it does bring additional resources, experience, and insight to help evaluate alternatives and make decisions.” As a matter of fact, Mr. Reba shared that he insists the reporting to the PEG and to the management team be aligned because they should both be interested in the same things.

Short Time Horizon

Another difference discussed related to how strategic planning is particularly tricky in the private equity environment where CFOs deal with a shorter or more defined time horizon. “[PEGs] typically target selling their portfolio companies after four or five years, which greatly impacts decisions involving investments, especially in infrastructure matters,” said Mr. Reba.

The challenge of having “two bosses” was discussed, as private-equity-backed CFOs are usually accountable to both the CEO of the portfolio company and the Board, which is typically controlled by the PEG. Mr. Reba advised CFOs in this spot to be “always conscious of the potentially competing priorities of the CEO and the Board.” While many companies have matrixed organizational structures today, CEOs in the small-cap private equity space are often the original company founders, who are very entrepreneurially oriented, and unaccustomed to not having total control of the company. The CFO often finds him- or herself addressing the CEO’s emotional adjustment.

Finally, the group brought up the topic of job security. “I was surprised it took so long to get to this,” remarked Mr. Reba, as the CFO is usually in the most tenuous role, particularly at a private-equity-backed company where management and other changes occur every four or five years. He explained, “Whenever an ownership change occurs, there is a chance of a change in management, and often it is a new CEO or a new PEG who wants to have their person in the CFO role. But that is no longer as automatic as in the past. “I am thrilled when a decision is made to keep a strong management team in place,” said Mr. Reba.

Still, for many, the risk of having to look for a new job after only four or five years is outweighed by the reward that comes with a successful exit for the PEG. “Usually the CFO has been incentivized with a piece of equity and can realize a nice payday,” said Mr. Reba. The cash compensation/equity ownership tradeoff with accompanying risks and rewards is more commonly seen in the private equity space than in other arenas.

Furthermore, Mr. Reba added, “If you did a good job, if you were successful and increased value, an active private equity firm may likely have another opportunity for you.”

Mr. Reba noted that over the course of his career he has worked in private, public, and private-equitybacked organizations and particularly enjoys working in the small and middle markets when a PEG is involved. “In addition to the financial leader sitting in a prime position to create value for the company, the ability to leverage the financial and operational capabilities of a strong PEG makes coming to work every day a fun assignment for the CFO.”

Rules for Success

As the discussion wound down, Mr. Reba took a moment to share his rules for being successful as a CFO at a company that is owned by a PEG. “First and foremost,” he said, “transparency.” He continued, “If there is bad news, inform the PEG immediately. It won’t get better with time, and nobody likes surprises.”

Second, Mr. Reba said, “keep an eye on the amount of cash and watch bank covenants.” Finally, Mr. Reba encouraged CFOs at companies with private equity owners to be on top of their numbers. “Be aware of how you are tracking against the plan and the trends in key performance indicators. Are you where you’re supposed to be?” He pointed out that getting back on track can take time, so measure constantly and adjust quickly; don’t wait.

In closing, Mr. Reba reiterated, “While the challenges and risks of the private equity CFO job are great, the rewards and opportunities can be far greater. “The CFO of a small company is often an island unto him- or herself, whereas the CFO of a company that is backed by the right PEG has much greater resources at his or her fingertips.” And that, he said, is indeed a bonus.

Equity Partners


As Seen in CFO Studio Magazine Q3 2015 Issue

By Ed Schultz Partner, Highlands Business Group



You have the opportunity to work with a private equity group (PEG), probably through the acquisition of your present company, or working on an interim assignment with the portfolio company. Congratulations, you are part of a $4 trillion worldwide industry! What is the best way to succeed with your new owners?

Get Their Measure

Understand the backgrounds of most PEG investors, and how it influences their attitudes and behaviors toward their portfolio companies. PEG partners and principals are typically finance or business generalists with backgrounds from other financial companies, such as investment banks, and/or they have grown other companies successfully and have decided to get into PEGs. While they may understand accounting, they see business strategy first and are not as concerned with the debits and credits much of the time. When they want to delve into the financial or other areas you are responsible for, they will need guidance.

2 Realize Their Stress Levels

It is important to remember that PEG executives answer to other members of their organization, such as their firm’s leadership. Additionally, their industry is quite competitive and returns are the only measure that their ultimate owners (who could be limited partners attached to other financial institutions or pension funds) review. Try to appreciate their pressures.

Know What They Are Looking for

Try to absorb as many due diligence and other reports as practicable to understand what the PEG partners have learned. Discuss these reports with them, as well as their goals for your company. As the economy changes and their portfolio evolves, their attitude toward your company may as well, and you need to understand the new landscape. Communicate frequently and learn.

Support Their Needs

PEGs are heavily into the details as they usually actively participate in not only board-level business, but also in the upper-level management of the company and will also deep dive at times. Some or all of the team that you encounter, particularly more junior members, will be analyzing and modeling. After you have added your own practical expertise to the combined efforts, try to incorporate their work into your planning so everyone is on the same path.

5 Help With Course Correction

Plans often go awry. Remembering the PEG’s own internal and external hierarchy, realize that a sudden negative variance in results can cause sleepless nights and additional work for all. This is where your experience and strong communication skills can be invaluable in improving the relationship between the PEG and your management. As the PEG looks for answers and corrective action, your efforts, insights, and creativity can go a long way in supporting their needs, and can improve the situation for the entire team.

Following these rules will put you on the road to success with your PEG owners.

Preparing for Private Equity


Screenshot (15)


As Seen in CFO Studio Magazine Q1/Q2 2016 Issue


Going after private equity funding was the focus of a CFO Studio Executive Dinner held at Blue Morel in Morristown, NJ. Luke McKinnon, recently having served as Chief Financial Officer of a global engineering services company, was the discussion leader.

“Going out and raising privScreenshot (17)ate equity is a huge effort,” said Mr. McKinnon.

Successful private equity firms have financial controls in place that focus on the basics of performance— revenue, operating margins, and cash flow. McKinnon was tasked with finding a long-term minority-interest investor for the global engineering services company he was part of, one who would be willing to have a seven- to ten-year relationship. “We found three firms interested in this length of term. Although they are called private equity, many of those investment companies are more family-run type places,” explained McKinnon.

The company McKinnon was with was global in nature, with operations in countries including Afghanistan, Iraq, Sudan, the Congo, Vietnam, Thailand, and Indonesia. “At one point, I had 2,000 bank accounts around the world,” said McKinnon.

This wasn’t the only challenge the private equity firm had to contend with. “They are focused on Day Sales Outstanding (DSOs) and cash flows,” said McKinnon.

This comment led to a discussion about DSOs. Bill Baldwin, Chief Financial Officer, Kepner-Tregoe, Inc., a Princeton, NJ–based capability development and consulting solutions company said, “Our most troublesome country is India, whether it’s with a major IT company or another Fortune 500 client that we deal, in India it’s a very, very long payment cycle.”

Delayed payments have become the norm. Historically, government agencies are known to be sluggish. “We provide engineering and consulting services to the government sector, mainly municipalities and counties, and they’re always dealing with funding and processing issues, so we’re probably at 115 to 130 days,” said Michael Dentici, Senior Vice President, Chief Financial Officer, T&M Associates, an engineering, planning, and environmental consulting firm based in Middletown, NJ.

Procurement and finance are becoming more interwoven than ever. “We’ve been involved in deals where the client’s procurement executives say, ‘We require 60- to 90-day terms, to which we counter that our prices will go up 15 percent, to which the client often agrees. This makes absolutely no financial sense, because the 15 percent fee increase is much more than the cost of money. There is a disconnect in the performance systems and communications between procurement and finance when this happens,” said Mr. Baldwin.

Peter Pfreundschuh, Vice President Finance and Chief Financial Officer, Immunomedics, Inc., a Morris Plains, NJ– based biopharmaceutical company, said not only are payments in each country unique, but they are ever changing. “When I first audited payments with some French companies, we were seeing 360-day payment cycles. A law was then enacted in which companies were required to pay on time.”

John McAndris Jr., Chief Financial Officer and Vice President of Finance, JJM Consulting, LLC was previously in charge of Latin America for Pfizer/Wyeth. “Venezuela is a country that is very tough, as many companies there never release money. You have to go to the government to get a special dispensation to get the money out of the country,” he explained. Screenshot (16)

This discussion put things in perspective for Andrew Wood, Chief Financial Officer, J. Fletcher Creamer & Son, Inc., a Hackensack, NJ–based contractor. “About half of our work is with government agencies and the other half is with private companies. Most of our work is with utility companies, which are semi-regulated. I used to complain…until I heard you guys. Our DSOs are in that 65- to 68-day range, which is not that bad, compared to all of you,” said Wood.

Selling accounts receivable is a standard form of managing cash flow and is something with which Gunther Mertens has experience. Mr. Mertens is President, North America Region of Elmwood Park, NJ– based Agfa Corporation, the North American arm of global imaging leader Agfa-Gevaert N.V. “Our DSO is actually 45 days, which is good. But what we see is that some bigger companies are asking us to offer extended-payment terms beyond the standard 30 days, in exchange for a supplier-side financing program,” said Mertens.

As an example, Mertens explains that if a customer owes Agfa $1,000 and payment term is 60 days, the customer’s bank will pay Agfa $995 after only 10 days. The customer in turn will pay his bank $1,000 after 60 days. “So the customer achieves his goal of improved cash flow by keeping his cash 30 days longer,” said Mertens. “The customer tries to make this palatable to Agfa by not deteriorating vendor’s cash flow by 30 days and instead improving vendor’s cash flow by 20 days. But there is a cost to the vendor similar to if the vendor were to sell its receivables.”

Prioritizing revenue cycle issues was of paramount interest to most CFOs at the CFO Studio Executive Dinner. “If you don’t bill them, they don’t pay. The start-up time is in the invoice. If you change the terms of your agreements, so that your billing point is earlier, you can actually move forward the payment,” said Barry Lederman, Chief Financial Officer, Whippany, NJ–based Halo Pharmaceutical, a contract development and manufacturing organization that provides scientific and development expertise.

A steady billing cycle is key to success. “When I was in professional services, one of the things we changed right away was, instead of billing at the end of the month, we started billing every two weeks,” said Michael Roth, Chief Financial Officer, Chief Operating Officer, Beefeaters Holding Company, a North Bergen, NJ–based manufacturer of dog treats. “We dramatically increased cash flow by billing major customers every two weeks.”

The Right Partner Screenshot (18)

“One of the most important lessons for everybody is to get the right people to invest,” said Ed Schultz, Principal, of New Jersey–based Highlands Business Group, a consulting firm. “It’s important to make sure the due diligence is right, that the fit is correct, and that you’re not going to get beaten up. A lot of deals go south because the private equity firm didn’t listen and didn’t gain a solid understanding of the business. Sometimes, they only want to do the deal and aren’t thinking about who they’re investing in.”

The correct fit is important. “There are two things to consider: style and strategy. Does everybody agree about what the company is going to look like in the future? Is there knowledge of the industry and can you really get along with these folks? What is their style going to be on a tactical basis, too?” ponders New York City–based Curt Cornwell, Partner, Transaction Services, PricewaterhouseCoopers, a leading professional services network, and a CFO Studio Business Development Partner.

Andrew Savadelis, Chief Financial Officer, Angion Biomedica Corporation, a Uniondale, NY–based biopharmaceutical company, pointed out the uniqueness of the arrangement made at the company McKinnon had worked for. “It’s not private equity in normal terms. It sounds like it is more Venture Capital than Private Equity. VCs tend to take a longer-term perspective, but they also look for higher returns on their capital gains.”

Many agreed with Savadelis. “I concur, as the VC model typically includes raising a fund that is very industry-centric,” said Gregg Kam, Chief Financial Officer, Sonneborn, a Parsippany, NJ–based manufacturer and supplier of high-purity specialty hydrocarbons.

When preparing for private equity, sell-side reports have become a trend, according to PricewaterhouseCoopers. A selling company has an accounting firm come in, prepare a quality earnings analysis, a debt analysis, as well as details on trends being experienced, and that book goes out.

Allen Lane, Senior Vice President and Chief Financial Officer, Solix, a Parsippany, NJ–based provider of program administration, eligibility determination, and call center services, said, “I’ve been reading through a lot of these recently. There is a definite marketing slant on the part of the seller in these documents. They are a nice road map to begin your discussions with, but you still have to do a full due diligence review.”

Mr. McAndris of JJM Consulting said sell-side reports help from another perspective. “You can steer the course of where you want the buyer to look. You’re controlling the conversation,” he added.

In some instances, these procedures are not necessary. “We were headed down the road of going public and [our investors] came along and made us an offer that was about 50 percent above our projected IPO price. That’s what we call a no-brainer,” said Bert Marchio, Chief Accounting and Operations Officer, Edge Therapeutics, a Berkeley Heights, NJ–based clinical-stage biopharmaceutical company.

There are cases where acquirers don’t see the forest for the trees. “Every due diligence sale that I’ve been through, some companies got involved and looked at minutiae that didn’t really mean anything. For example, ‘I see you spent $22,000 on a particular purchase. What was it? Oh, it was a Christmas party,’ ” said Mr. Kam. “They often miss the big picture about the business in due diligence, focusing on immaterial items.”

Copyright 2017