Post-deal, private equity investors retain their existing portfolio company CFOs only 25% of the time. But 2024 has fueled an already serious CFO turnover fire. The first half of the year saw record demand for CFO hires to fill record levels of vacancies.
This isn't a big surprise to anyone following the PE industry. With multiples down, sponsors are obsessed with performance. Many PE firms have decided that this new performance mandate will require a CFO with better operational and value-creation capabilities. In fact, according to a prominent recruiter, “sponsors are urging their portfolio companies to replace their existing CFOs with CEOs who have a proven ability to drive EBITDA.”
As a result, there are more new CFOs than ever before, and an increasing number of finance leaders who must develop effective plans for their first 100 days. The job of new CFOs is made even more difficult by a significant shift in sponsor priorities. Sponsors are now:
- Hungry for a bargain: Thanks to record-high cash reserves and stable interest rates, investors are highly motivated to start buying, even if conditions aren't ideal.
- Ready to finish: They feel an urgency to allocate capital to LPs, who have seen historically poor returns over the past few years.
- Focus on value creation: They are aware of their limitations Multiple arbitrage trading They want a CFO who can boost their reputation by significantly improving EBITDA.
So CFOs who want to avoid the same fate as their predecessors, or who are taking on institutional equity for the first time, will need to develop and follow an entirely new first 100-day strategy.
Your new first 100-day plan should address urgent “leaky bucket” needs, address fundamental flaws in your finance organization, and develop an ambitious transformation plan to uncover hidden value.
The first 50 days: Triaging urgent issues
- Step 1: Prepare to leaveAssets are constantly being sold. Sponsors are under pressure to deliver returns to LPs. Preparing for an exit is not a 3-month process. Eight specific variables that determine a company's valuation and equity story must be thoroughly explored: technology stack, systems and data environment, accounting, quality of earnings preparation, financial and operational forecasts, data cubes/KPIs/reporting, transaction marketing, due diligence, virtual deal room, administrative preparation, and legal/regulatory issues. Early understanding of the company's baseline against factors that influence exit price can enable the new CFO to prioritize future plans to prepare for an exit upon request.
- Step 2: Make sure your cash flow is flowing. Cash is a panacea for uncertainty, but PE portfolio companies tend to be cash-poor by design. New CFOs should take a hard look at the company's 13-week cash flow forecast, examine the frequency and quality of accounts receivable, and identify any large vendor, liability, or one-time payments. They should also be on the lookout for near-term killers, such as a liquidity crisis. The key is to proactively address liquidity concerns with the board.
- Step 3: Audit your Value Creation Plan (VCP). The new CFO should conduct an internal audit to determine which value creation levers have been pulled and the extent to which those levers achieved the desired outcomes. Additionally, they should identify synergies and tactics that have not yet been fully realized or executed. They should work with sponsors to ensure they are working from the same future value plan. If the investment thesis has not changed, that's great. But if it has, the CFO needs to not only understand the reasons behind those changes, but also codify them.
- Step 4: Address holes in the report. CFOs and sponsors often fail to reflect updates to the VCP in their reporting systems, so as soon as the CFO audits the VCP, they should audit the reports that track it as well. This initial review should focus on content — making sure finance teams are translating the right data into actionable, high-level insights needed to make informed decisions — but it's equally important to review frequency so the CFO is providing the right information at the right frequency to key stakeholders.
- Step 5: Plan now for future M&A. The past few years have seen a flood of bolt-on acquisitions with little realised synergies due to poor integration. As sponsors look to consolidate deals, CFOS must devote the first 100 days to planning for these transactions, as their teams will be tasked with integrating the mergers and demonstrating their success. Merger muscle memory. The final step in a CFO's first 50 days is to assign a team to design or update the integration playbook.
Second 50 days: Tackle TFoundational Pillars
- Step 6: Build the data engine. We used to call this step “Building a Data Foundation.” CFOs need visibility into detailed metrics to understand variances and the root causes of performance or underperformance. CFOs need to leverage CPM, BI, or data warehouse systems to establish a “single source of truth” that collects and consolidates data for analysis. However, in 2024, we are no longer at the starting point of a data-enabled finance function. The new CFO needs to make the most of future state analytics. That means instead of relying on historical data, internal stakeholders need insights based on leading indicators to make more informed day-to-day decisions.
- Step 7: Design your future tech stack. Step 6 won't work unless it's done in conjunction with a systems audit. To ensure that systems can support leading indicator data, CFOs should invest in the right integration architecture suite to fill system gaps and drive optimized financial and operational reporting. This step includes:eatA technology overhaul is also necessary, but it will likely come down to finding the right connectivity tools to harmonize old architectures. For example, does the ERP system cover core business operational and financial processes? If not, CFOs need to find partners to build complementary, scalable enterprise performance management systems and data and analytics solutions to streamline monthly close, reporting, budgeting, and forecasting processes.
- Step 8: Establish an integrated business plan. While periodic forecasting will always be a critical component of the CFO function, new CFOs need to make cash flow an ongoing and integrated part of the cross-functional business planning process — educating, informing, and cultivating accountability for company leadership. Teams across the enterprise can see that cash forecasts are linked to business forecasts and supply and demand plans. Plus, forecasting, when done well, makes the budgeting process easier.
Beyond the first 100: Transforming for future value
- Step 9: Identify your transformation mission. Sponsors are looking for a new CFO who will invest in proactive efforts to discover and unlock hidden value. There is only one rule when it comes to what transformation they want the CFO to lead: it must be value that will move the exit price. Whether as part of step 1 (the sell-side readiness audit) or as a separate step, at the end of the 100-day plan, a transformation initiative should be identified that will be presented to both the board and sponsor, along with target investment amounts and expected return metrics. The success of this initiative will depend in large part on the CFO's willingness to go beyond traditional financial reporting responsibilities to address operational and financial efficiencies and improve working capital.
The first 100 days should be spent assessing the finance function to ensure it has the expertise and resources to support steps 1 through 9. CFOs should evaluate their teams to ensure they are balanced and scalable. It is wise to invest in experts who can work with the organization's data and systems. Finally, CFOs should consider which external partners will best support their data and transformation initiatives.
