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.”

Retail Strategy


Screenshot (1)

As Seen in CFO Studio Magazine Q1/Q2 2016 Issue



In 2012, Ulta Beauty, a retail business carrying everything beauty-related— from mass cosmetics to high-end anti-aging creams and services for hair, brows, and skin—had come to a fork in the road, according to CFO Scott Settersten. “We were executing well in areas to drive revenue growth, such as building new stores and adding exciting new products, but we had not taken a holistic view of what investments in people, process, and systems would sustain those revenue-driving tactics and a healthy business over the long term.”

Settersten, who had been with the company since 2005, was appointed Acting Chief Financial Officer in October 2012, when the CFO resigned. Settersten got the CFO job permanently in March 2013. The CEO’s office was also in transition that year; current CEO Mary Dillon came aboard that July. So, late that year, the new leadership team undertook to create a long-term strategic plan.

Investor expectations did not necessarily align with “how the business was actually operating,” nor with “what we thought we really needed to do to support the long-term health of the company,” says Settersten.

The Process

Rather than bring in a consultant like McKinsey or Bain to direct, develop, and craft a strategy, Bolingbrook, IL–based Ulta Beauty developed its own hybrid model with a small internal strategy group that reports up through Finance. They brought in a third party to help facilitate the strategy development with the senior team at various touch points throughout the process. “Senior management was going to own the strategy-development process, because at the end of the day, we were the ones who would have to implement it,” says Settersten. “As a leadership team, we needed to better define What is Ulta Beauty? What do we stand for? What are the strengths and weaknesses of our business model? Then we needed some external subject-matter experts to help us think about competition, our positioning in the marketplace, what the future of retail and beauty might look like from a guest [Ulta Beauty’s term for customer] perspective, and how consumer expectations might also change.”

Brand partners spoke to the group about the beauty category and the competition and where they saw future growth levers. Other subject-matter experts helped the group think through real estate strategies and how to meet guest expectations on the e-commerce side.

The company had been growing rapidly for many years, both through opening new stores and e-commerce growth of 40 to 50 percent each year. “You’re so focused on managing the day-to-day business to support the high growth that you don’t often have time to sit back and think about the future. At the same time, we had made certain assumptions about business drivers that had never been formally tested,” says Settersten.

For example, Ulta Beauty’s now roughly 875 stores include full-service salons, and provide brow and skin services as well. “We had theorized that guests using our service offerings were our most valuable, because of the repeat nature of the service business and the retail product attachment. But we didn’t fully understand how much each guest spent at Ulta Beauty on an annual basis or exactly what types of products they purchased. We also wanted to determine what percentage of our guests used our services and what we could do to get more of our loyalty members to try our services —a huge opportunity.”

The strategy group led the leadership team through a fact-finding exercise, which included a review of historical operating metrics and a deep dive into Ulta Beauty’s data-rich loyalty program. Then Ulta Beauty’s financial planning and analysis (FP&A) team, which also reports to Settersten, got involved, gathering future-looking data from the business units. “We believe it works best for us to have the linkage between strategy and FP&A under the Finance umbrella,” he says. “You eliminate confusion and inefficiencies when everyone is using the same numbers and metrics, and it makes it much easier to link past performance with future financial targets.”

Finally, with the strategy group facilitating, senior leadership created six “strategic imperatives.” These spelled out what future growth would depend upon, from acquiring new guests and deepening loyalty with existing ones, to investing in infrastructure to support growth. And then the team agreed to a timeline to communicate the strategy to its stakeholders.

Countdown to Investor Day

“During the one-year-plus window, job No. 1 for me, the CEO, and our Vice President of Investor Relations, was to manage investor expectations,” says Settersten. “Oftentimes the word ‘investment’ carries a negative connotation to investors, especially when the company’s share price is based on a high earnings multiple.”

In each of the quarterly earnings calls and in meetings with investors during this period, the company fielded questions about the type of investments needed, how much they would cost, and what the implications were to the long-term financial guidance. “We can’t share that with you until we complete the strategy work,” Settersten told them. He promised that the leadership team would announce the complete financial picture at an Investor Day in the Fall of 2014— the company’s first such event.

Some of the investments would be large, such as the cost to reengineer Ulta Beauty’s supply chain, including several new distribution centers with IT systems to help the company better forecast and more rapidly replenish the more than 20,000 products it stocks in each of its stores. These investments would involve, too, large down payments, so there would be short-term deleverage in the profit-and-loss statement in order to capture long-term operating efficiencies.

“We were concerned with how investors would react,” says Settersten. “Of course, we believed the good news was that these investments would improve the guest experience and make us a stronger and more profitable business over the long term.”

Ulta Beauty’s Board of Directors was uneasy too. (See sidebar at right to learn how Settersten worked to calm their fears.) With management and the Board aligned, the investor communications were finalized. The Investor Day was held in Chicago in October 2014, and management’s presentations, including Settersten’s summary of investments, benefits, and long-term financial outlook, were well received. Wall Street’s response was very positive. The verdict? Ulta Beauty’s growth story was strong and clearly communicated.

Ulta Beauty’s stock price soon reached all-time highs. Recently the company’s stock price was in the $185 range, which Settersten attributes to the team’s successful execution against a well-constructed and -communicated long-term strategic plan.

Meanwhile, he and his team have quickly refocused on ensuring the strategy process becomes part of the company’s day-to-day operating activities and now are engaged in a long-term strategy refresh. Ulta Beauty, thanks to the exercise of creating a long-term strategic plan, has a good sense of what it takes to be effective in 21st century retailing.

Efficiency Defined



As Seen in CFO Studio Magazine Q1/Q2 2016 IssueScreenshot (3)




As CFO of Morristown, NJ–based Schindler Elevator Corporation— the largest legal entity of the Schindler Group, a 54,000-employee, Swiss-based global mobility provider with about $9 billion ($US) in annual sales — Michael Bickel has responsibility for U.S. strategy and other initiatives, in addition to budgeting and financing. But Bickel sees himself as a weatherman.

“Being a weatherman involves studying the global corporate climate, from the economy to competitors to politics,” Bickel explains. “Then you relate this awareness to your company, and determine how it may impact your business and what proactive steps you can take to keep your company on top.”

He says that an effective CFO focuses on six core areas. Bickel’s Six Core Components of Effectiveness include:

1. Watching the weather

2. Fulfilling a leadership role

3. Seeking marginal profit opportunities

4. Signing on as a “front-line player” who supports front-line staff

5. Acting as “copilot” to business unit leaders

6. Embracing the role of internal ambassador.

As a leader, a CFO has to drive strategy and chart a course, even as he or she solicits and considers advice from other team members. “It’s also very important to identify, challenge, and overcome obstacles,” Bickel says. “You cannot be effective by standing behind others and simply following them.”

Instead, an effective CFO will get all the key players involved in the business processes, helping them to see how their individual contributions will help the entire enterprise to move ahead. Bickel says this copilot approach calls for a willingness to share responsibility when appropriate, a method that is 180 degrees removed from a “silo” mindset, where the CFO hordes information and hinders a company’s ability to operate effectively.

An engaged CFO also seeks out new data, and is willing and able to understand and translate it into meaningful information, he adds. “All six Components of Effectiveness should be considered as integral parts of a comprehensive approach that yields efficiency and results.”

A Solid Foundation

Before a CFO can mount that kind of six-pronged management approach, he or she needs a good foundation that includes a bottom-to-top understanding of the enterprise. In Bickel’s case, a unique background was extremely valuable.

“I literally learned about Schindler from the ground up, beginning by helping to install an elevator in my first month working for Schindler Switzerland, where I was very close to the branch, as well as factory shop floor operations, throughout my daily work as internal auditor,” he recalls. “It’s a very practical way to gain experience.”

A Swiss native, Bickel holds a Master of Economics from the University of Berne, is a Certified Financial Analyst, and graduated from the Advanced Executive Program at Northwestern University’s Kellogg School of Management. He got his first work experience in a pump engineering company, cofounded with his brother, Thomas.

“But I wanted to learn more, so in 1997 I joined the management training program at Baloise Insurance, where I got involved in strategic project management, M&A, and other activities,” he says. “Later, I went to Ernst & Young’s Swiss practice, where I learned a great deal about enterprise-wide risk management, financial advisory, audit and attestation, and sales and client relationship activities. I enjoyed working for different multinational clients abroad and gained experience and insights into critical success factors, as well as best demonstrated practices across multiple industries.”

At Ernst & Young, Schindler was one of his internal audit clients; so in 2005, Bickel hopped across the ocean to become Schindler’s Head of Internal Audit North America, managing all internal audit, risk, and compliance-related activities for Schindler North America’s U.S. and Canada operations. He also developed strategic audit plans, supervised and executed field audits, addressed critical company-wide issues, and ensured proper corrective actions were taken when needed.

“My audit responsibilities included spending a lot of time in field operations, where I got a wall-to-wall look at the business and learned about Schindler firsthand from the branch level up,” Bickel relates.

He soon rose to become Lead Area Controller for Schindler’s Americas Zone, responsible for 10 group companies with more than 10,000 employees. He also worked closely on operational and strategic activity with Schindler’s former CEO Americas Jakob Zueger, along with individual company leaders and unit-level CFOs. Bickel also directed the Americas Zone’s financial planning and budgeting activities, recommending process improvements, training key finance staff, and assisting with a variety of operations, including a key profit-enhancing project and an important cross-border M&A.

“I co-led a significant service business project (“project step”), which increased Schindler USA’s service margin by about 5 percent,” Bickel recalls. “We developed detailed benchmarking against our major market competitors with regards to issues like service model/planning, methods, tools, contracts, and metrics.”

As a result of the study, Schindler USA was able to slice $35 million of costs from 2010 to 2012 by reducing the number of service technicians from about 1,700 to about 1,500, with no productivity loss.

He was also co-leader of due diligence in the 2010 acquisition of Compania de Servicios S.A., a dominant Colombian company that designed, manufactured, installed, and maintained elevators and related products. “The acquisition of Compania de Servicios S.A. gave Schindler E&E [elevator and escalator] market leadership in Colombia,” Bickel notes.

In 2011, Bickel officially moved into his first CFO appointment, serving a three-year tour of duty in Shanghai as CFO of Schindler China, the Group’s second-largest business, with more than 5,000 employees.

The promotion made him responsible for all of the financial operational activities in that unit, from accounting and reporting to IT and finance projects. “I was a member of the Board of Directors of Schindler China, and I had oversight of the Finance department along with an IT team of more than 80 persons across multiple locations in China,” Bickel says.

During his time there, Bickel was instrumental in doubling the unit’s operating revenue. He started by establishing a three-year growth and profit plan with specific target numbers that let everyone know their goal, and followed up by instituting reforms with a focus on improving new-installation sales and cost reductions.

“We took steps to gain market share by launching new products designed and built in China for China, and increased the geographical coverage through accelerated branch expansion and by setting up a professional key account management,” he says.

Bickel also bolstered the bottom line with a strong focus on reducing product costs by implementing a fully dedicated cross-functional cost leadership team that pays particular attention to supplier negotiation, product design changes, and state-of-the-art production processes. The team also optimizes subcontractor costs with new installation methods and drives bad-debt management and accounts receivables collection, Bickel says. “My experience is that net cash must always support the profit trend; otherwise there is an issue. For example, ‘figure play’ [a reference to accounting methods that may boost reported profits even though cash flow is actually decreasing]: I was driving this area very hard in China. We also introduced improved finance and controlling tools to identify key profit drivers in each product line, so we always knew where we were and what we had to drive.”

Bickel also facilitated, without business interruptions, one of China’s first cross-district mergers, between Schindler China and Suzhou Schindler Elevator Co.

All of which helped to prepare Bickel for his move to Morristown, as CFO of the North American division.

Setting and Reaching GoalsScreenshot (4)

“Finance guys are typically risk averse, but if you want to move ahead, you’ve got to take some reasonable chances,” he says. “Instead of being defensive all the time, and just looking for ways to shield the company from the downside, you must be able to identify upside opportunities and ask yourself how we can take advantage of them.”

He’s currently working on a key project that is designed to increase Schindler USA’s earnings before interest and taxes by 5 percent within two years.

The strategy includes pricing initiatives, enhancements to Schindler’s supply-chain performance, the reduction of profit variability among branches with customized business priorities, and 80 percent benchmarking. The initiative also features improved new-installation and modernization execution approaches, and increased service margins through disciplined cost management, details Bickel. As he executes, Bickel continuously draws on his six Components of Effectiveness management paradigm (page 13).

But he’s also looking at de-risking the tax-qualified employee pension plan, and improving front-end-related processes and controls, while driving product liability exposure and implanting cost efficiencies across the enterprise. That will involve eliminating redundant or non-value-added roles, replacing underperforming individuals, and centralizing some roles that are currently held by field operations (and vice versa), he adds.

“Other areas I’ll be working on include revising our accounts receivable processes and policies to more fully align sales representatives with A/R and to automate upfront client payments prior to dispatching service technicians to callbacks not explicitly covered by contracts; and implementing the global SAP platform in Schindler USA,” Bickel reports. “To successfully implement these and other projects, I engage very actively with other departments, and together we support the entire business, from the front lines on through. It’s a constant evolution.”

Bickel says it is his “mission” to make the business more profitable. “To do this, regardless of which company you work for, a CFO has to understand challenges from the business unit point of view, and has to be able to integrate those needs and goals into the overall corporate strategy. It’s good to know what’s going on at the ocean level, as you can’t be steering the wheel all the time.”

It’s all part of the CFO-as-weatherman approach, figuring out which way the winds of the marketplace are blowing.

Copyright 2017