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10 COMMANDMENTS FOR CFOS OF PRIVATE EQUITY-BACKED COMPANIES

Updated: Aug 1, 2023

By Gene Jones and Edith Hamilton


The CFO role is the most difficult and challenging one in nearly every organization, and the Chief Financial Officer of a PE-backed portfolio company is the most multi-functional executive in the business. To be effective, it’s vital to be able to convey how the business creates value, and to be able to show others the levers that drive revenue as well as control costs.


Your inter-personal skills can make or break you as you deal with Operating Partners, investment bankers, lenders, law firms, accounting firms, risk management consultants, as well as your growing team. So here are our Top 10 Commandments learned from working in CFO Coaching in the private equity industry:


1. REMEMBER: YOU’RE NOT THE CONTROLLER.

The most common reason PE CFOs fail is that they’re insufficiently strategic. Like the Controller role they may have been promoted from, many are too backward-looking – reporting history, being buried in the day-to-day work of keeping the wheels on the bus. It’s easy to keep running, especially when your company is growing fast, to get lost in the details and postpone the execution of strategy. As the CFO, focus on your PE firm’s investment thesis, and make sure you have a meticulous Controller so you can get yourself out of the weeds. You must be forward-looking, and keep your eyes on the metrics important for the next liquidity event. For more on this, see CFO Coaching Tips for your First 100 Days and Beyond.


2. UPGRADE YOUR TEAM.

If you’ve recently been brought in and inherited a group of mostly ‘C’ players, change them. If you’ve been there a while, a change in the ownership structure is a great time to re-evaluate who has the skills and mental readiness to do the work you need for the next phase of growth. Think of it this way – if you’re General Manager of a major league team, do you keep .210 hitters on the roster because you “like them?” Make changes you need to.


Some of the biggest mistakes CFOs make is keeping mediocre players on their team too long, thinking they can coach them, or with time they will get there. While that may be true, in practice you don’t have time and you don’t have the runway. Yes, developing people is one of your most important responsibilities. But there’s a difference between (a) developing promising people with potential, and (b) making substandard performers adequately effective. Development and mentoring? Absolutely. Rehabilitation? Very rarely.


On the up-side, being required to find a new role is often the jolt that certain individuals may need in order to re-invent themselves and to show up for their next role with fresh energy, skills and greater vision. Or to find a role that has a more suitable pace than a private equity-backed company.


3. THE BOARD IS YOUR BOSS TOO.

Since the Board of Directors is your boss’s boss, to some extent you too serve at the pleasure of the Board. While your 1st loyalty is always to your CEO, you must also find a way to have some degree of independence from him or her. At some point, you may feel subtle pressure to spin results for a better story. This is a trap. Your Board wants to know the truth – not the CEO’s version of the truth.

If the company is underperforming and the CEO says something to the effect that “the numbers are wrong,” gently point to cash generation. GAAP results can be massaged, but cash doesn’t lie. Underperforming companies are usually not generating cash. Always uphold your principles and standards. You can always get another job somewhere, but once your ethics are tainted, you’re done. Be strong. A private equity CFO needs to maintain great mental fitness, develop a thick skin and a strong backbone.


4. LEARN WHAT DRIVES VALUE IN YOUR BUSINESS, THEN TEACH OTHERS.

Your executive team is focused on their areas of responsibility, yet how well do they understand the value drivers in both their own lane and in related verticals? Do you want some early wins? One proven approach is to host a few TED-Talk-like sessions – 17 minutes each, where you teach Director- and Manager-level leaders about the business model, operating levers that are most actionable, and how value is created. This is a great way to partner with your C-level peers and connect the dots between the decisions they make daily and the impact that has organization-wide.


5. YOU ARE THE CEO’S STRATEGIC PARTNER.

You sit in a different seat in the ballpark and probably see things differently. Don’t be afraid to express your opinion and make recommendations that may conflict with the CEO’s view. This is how you add value to a business. If you and the CEO always have the same views, you can be sure that your PE partners will notice this. In fact, one of the chief reasons private equity portfolio company CEOs and Operating Partners wish to find an executive coach for the CFO is to encourage and equip them for a more strategic role. They want a CFO who is willing and able to play devil’s advocate, to test assumptions, to challenge group-think in emotionally-intelligent ways.

6. INVEST IN AND LEVERAGE YOUR ERP SYSTEM.

If it’s bad, fix it or change it. This is a big undertaking, but you can’t and don’t want to run a growing company on the equivalent of spreadsheets. You need one source of the truth, and that source should be administered by finance. If each department executive maintains their sets of own data and believes their version of the truth, there can be no commitment, and therefore no accountability.


There is one version of the truth regarding both operating performance and financial metrics, and that has to come from one system: fed at the transaction level by each of the company’s functional departments, yet architected and typically maintained by Finance in collaboration with Operations and IT. And if not you, then who? If there’s no robust system in place, make it a priority to ensure one is developed and implemented by those you understand process flows across your company.

7. POLITICS AND DRAMA ARE PAR FOR THE COURSE. LEARN HOW TO NAVIGATE EFFECTIVELY.


Yes, stay out of the politics and side-step drama whenever you can: it uses valuable emotional energy and time – two things you’ll never have enough of. Don’t waste them. Yet in some cases it becomes inevitable and you need to take a position. Adopt a mindset of even-handed empathy, curiosity and creativity. It’s helpful to make a list of the values you want to honor in the situation, and actually use it as decision-making criteria when deciding what actions to take. Being aware of most common ways CFOs get in their own way is also useful.


8. BE JUDICIOUS WITH HOW YOU SPEND YOUR ENERGY.

Physical energy: this you can recharge fairly quick. Cognitive energy is also finite. You know how sometimes late in the day, you just can’t think clearly – you feel like you are done? Listen to your body. Stop pushing on a string: get some rest and you’ll soon be fine.

Emotional energy, however, is much more difficult to recharge, and you must guard it carefully to make it last. Once your emotional energy tank is drained, it takes a long time to refill and that’s what leads to burnout. If you get burned out, a recovery period of 6-12 months is not uncommon. It’s one reason CFOs are typically successful in negotiating a year-long severance arrangement: CEOs and PE Partners often know the toll burnout takes from their own experience.


9. ANCHOR YOURSELF IN LEADERSHIP PRINCIPLES.

As CFO, you are one of the top 2 or 3 players on the executive team, you see everything and know everything. So, remember that it’s not just the Finance and Accounting teams you are leading. You are shaping or re-shaping the culture. Regardless of all the technical skills you may have, non-technical skills related to leadership are the hardest to master. The leadership skills that underpin your success as a CFO of a PE-backed company will lead you to:

  • Create a shared vision: both for your finance team, and to ensure the CEO’s vision is clear at all levels of the organization.

  • Model the way: both for your direct reports, and for your C-level colleagues.

  • Challenge the processes that are being used: starting with the financial systems., and tracing the inflows back to the operational systems that feed forward-looking metrics for sales, development, ops, production, inventory, customer care, etc.

  • Equip others to act, and encourage them. Be mindful of the ways in which you may be getting in your own way here.


10. CONTINUING EDUCATION IS A REVITALIZER.

Regardless of your technical skills, always maintain your skills through participation in organizations such as Financial Executives Institute (FEI), or The Financial Executive Networking Group (FENG), or The CFO Leadership Council. For the 34% of CFOs who have a CPA: maintain your state license. There are countless virtual seminars available and many of them are free. And for those of us who are not CPAs, the Big 4 accounting firms have many online seminars – generally one hour each – and not all of them are technical. There are sessions on leadership, human resources, economic issues, negotiation, communication skills, and more. You may be busy, but it is vital to sharpen the saw: stay current with your skills.


A tall order for a CFO, for sure. It’s a tough job, and not for the faint-hearted. Your CEO, investors and team expect you to handle many technical issues in general, and your business, specifically. Developing strong personal and professional relationships with your Board, CEO, peers, bankers, brokers, and even CFOs at other firms is key for long-term success in the role.


Consider some of the ways in which you tend to get in your own way. (Here’s a self-assessment tool I recommend.) There’s typically no one in your company to guide or mentor you, so CFO organizations and peer cohorts can offer a refreshing place to share the load and recharge your energy. As you learn from mistakes and make course corrections, you’ll grow in both confidence, competence and executive presence.

 

Authored by Gene Jones (CPA, MBA, 6-time CFO) and Edith Hamilton (MBA, CPCC, former Group CFO and company CFO).


Edith Hamilton, MBA, CPCC is a certified executive coach for CFOs and VPs in Finance and Operations, particularly recently promoted women in the C-suite. She is a former executive of Fortune 500s, and has a background in private equity. With over 25 years’ experience in finance, operations, and growth strategies in corporations of all sizes including middle-market and entrepreneurial, Edith is a catalyst who accelerates leadership growth using tailored coaching frameworks that typically have an ROI of 4x-6x.

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