While an Operating Partner (OP) – usually with the credentials of a highly experienced CEO – is critically important to helping lower middle market private equity deal teams build value, the importance of an equally talented and proven interim CFO – otherwise known as the fractional CFO – cannot be overstated.
With an experienced OP and CFO onboard, a deal stands a much better chance of achieving the acquisition thesis objectives, avoiding risk, identifying hidden value, and ultimately optimizing exit value.
Which is why we consider the CFO the second leg of our three-legged stool upon which the deal CEO depends (the third leg being the Deal Partner – more on that in a succeeding post).
And much like an actual three-legged stool, the sturdier its construction, the greater the likelihood of portfolio company stability and success.
CFO Roles and Responsibilities
The CFO for LMM investments will play many roles, including:
- Build the Foundation – Financial reporting must be accurate, timely, credible, and compelling. Internal controls must safeguard assets and provide relevant scorecards to drive performance. This is job one.
- Leadership – As perhaps the second most critical management team member, the CFO needs to help lead the organization by helping determine the business strategy and reinforcing the need to deliver acquisition thesis goals with the rest of the management team and company employees.
- Strong Interface with PE Deal Team & Lenders – The relationship and alignment between the CEO and the PE deal team is critical to driving deal value. The CFO plays a vital role in translating the urgency of attaining acquisition thesis goals throughout the organization.
- Strong Administrative Competency – A strong CFO has competencies in administrative functions beyond accounting, which can be of great benefit to LMM companies. In many LMM companies, administrative functions, including information technology, legal, and human resources lack professional staff because workloads don’t justify FTE costs. The CFO brings a level of strategic oversight which, when the time comes, can support the organization in defining and sourcing these functions / roles in ways that keep the business moving toward an attractive exit.
Integrating with the Team
While the CFO is essentially to the CEO’s success (and, by extension, the deal itself), the real upside comes from the CFO’s intimate connection with those other two legs of the stool: the Operating Partner and the Deal Team.
The analogy of a three-legged stool is used because together, those three legs support the CEO and the deal; but also, because properly balanced, they provide deal stability in an era when a majority of CEOs managing portfolio companies fail to see the investment through to exit.
Executed correctly, each leg of this stool not only carries the weight of very specific expectations but, together, ensures the highest likelihood of long-term success. Take away a leg, however, and eventually, the stool topples.
Affordable, Experienced, On-Demand Support
A CFO versed in PE portfolio management understands that time is money and will hit the ground running (and best of all, will have the skills to do so). This CFO brings with him/her a sense of urgency, the need for fact-based decision-making, the mindset of abbreviated timelines, and the knowledge of how a PE Deal Team creates value.
Experienced OPs and CFOs who understand the PE value creation model and have created results within such environments are, of course, not cheap, which is why we – Mainsheet OP and Outliers LLC – are big believers in the fractional model of OP and CFO support. The CEO enjoys highly skilled, deeply experienced C-suite-level support, but does not require either full time.
This fractional approach is particularly important in the early stages of the hold period, when improvements need to be identified and executed as quickly and efficiently as possible.