Far from acting as often flawed stopgaps, interim CFOs at PE-backed companies can act as critical transformation figures.
You may be used to thinking the word “interim” means “temporary” or “stopgap”. But in the case of the private equity-backed interim CFO, the word takes on a different meaning. Interim CFOs at PE-backed companies can act as critical transformational figures who can help ensure that the stage is adequately set for the next finance leader to meet, and in fact exceed, measuring, managing, and scaling expectations. In a market where CFO talent is in high demand, the interim CFO can be critical to a business’ success.
The transformation of the position
Long gone are the days when the PE-backed portfolio company CFO’s chief role was the controller. From pandemic-induced volatility, to an inflationary and pre-recessionary economy, to a disrupted global supply chain and novel geo-political issues, to access to an avalanche of it-should-be-helpful-but-it’s-often-inaccurate-and-overwhelming data, the modern-day CFO’s role may be among the hardest within enterprise management and it’s only gotten more difficult. No longer simply a number cruncher, the new CFO must simultaneously measure the business, manage the business, and critical to PE ownership, scale the business.
The failings of the role
But by and large, many CFOs are not doing any of that particularly well – or at least not up to the expectations of their investors, according to Accordion’s State of the PE-Sponsored CFO Relationship survey, conducted in 2021 and published last year. That survey found that 81 percent of CFOs are not living up to their sponsors’ “measure the business” expectations, defined as their ability to collect clean data relevant to their operations. Similarly, 91 percent are not meeting their sponsors’ expectations regarding their ability to “manage this business”, or analyze and derive insights from their data. Eighty seven percent fall short of their backers’ “scale the business” expectations – their ability to act on the insights derived from their data.
The departure from the role
And that’s one of the reasons there is accelerated turnover in the position: post-deal, private equity investors retain the existing portfolio company CFO only 25 percent of the time, according to the survey. That means 75 percent of PE-backed CFOs will be fired, or more politely asked to move on from their role. What that figure does not include is the growing number of CFOs who are voluntarily leaving for greener (or perhaps less rigorous) pastures.
These three factors (the transformation, the failings, and the departures) combine to create one broader bottom line: Sponsors have CFO vacancies to fill.
How most sponsors fill CFO vacancies
Given the importance of the position to the success of the company, most sponsors rightfully seek to fill those vacancies as soon as possible and immediately initiate a hiring process to find the next permanent CFO. During that process, they fill the vacancy with an interim executive (either from the outside, or more commonly, by temporarily elevating someone from within the finance organization).
It’s not the wrong approach, but it’s also not the best answer for finding an optimal long-term CFO. There are three reasons why:
The CFO is not the only hole to plug: Yes, the buck stops with the CFO, hence the accelerated rates of departure. But, when a CFO does not meet expectations, there are often foundational issues within the department that are broken or have simply never been adequately built. The finance department should be a tech-enabled, lean organization with effective systems (and systems integration), streamlined processes for finance-owned functions, and imbued with internal expertise related to accounting, planning, forecasting, and reporting. These attributes are unlikely to exist in an optimal manner when a situation warrants removal of the in-seat CFO. Someone needs to fix and redesign the finance function paradigm. But there’s a reason that someone should not be the next CFO – at least, not immediately (more on that later).
Significant disruption to the organization: The CFO is not only integral to the success of the company, they will be a leading executive within the firm, a critical liaison to the sponsor, a collaborator with other functional/business unit heads, and a leader to the finance professionals within the organization. Hiring the wrong CFO to fill the vacancy quickly can have rather dire consequences related to attrition and stakeholder confidence. In fact, the wrong hire can substantively set the organization back, instead of propelling it forward.
Limited pool of candidates: Good CFOs are hard to find, particularly those with PE-backed experience, who understand the dynamics between portfolio companies and sponsors, can operate with both speed and agility in a volatile economy, are fluent in the full suite of finance function technologies (and their operating counterparts) and inspire confidence in both their team and key stakeholders. They’re not a dime a dozen, and as a result, they tend to have their pick of opportunities. Finding the right CFO is as much about feeling confident about the candidate, as it is about selling the portfolio company to the candidate. A finance department without the foundational tools in place can make for a hard sell and can (and likely will) limit the pool of potential candidates, often removing the most exceptional performers.
The interim solution
So, what’s a portfolio company with a CFO vacancy to do? The answer is to rethink the interim paradigm. The interim CFO should not be viewed as a stopgap figure, but rather as a fixer who can build the right finance function foundation. These fixers – experts who come from outside the organization – should be provided time to investigate the gaps in finance function processes, technologies, and talent. Importantly, they must also be afforded the discretion to address deficiencies to create a well-functioning department for CFO successor to seamlessly step into and lead.
This reimagined interim role not only quickly addresses functional deficiencies, but also informs the characteristics, traits, and expertise the next CFO will need to succeed in the role. That more detailed “job description” will help provide clarity for the hiring exercise and will limit the potential for making a wrong hire.
Finally, a finance function that is already operating in a way that aligns to sponsor expectations will naturally increase the caliber of talent interested in the role; the sell to the right candidate will be an easier one.
Craig is a Senior Managing Director with more than 20 years of financial restructuring, strategic advisory, and operational turnaround experience, including serving in C-level executive, interim management, and lead restructuring advisor roles for companies facing a variety of complex situations including rapid growth scenarios, underperformance, out-of-court restructurings, and Chapter 11 proceedings. He has significant experience in helping companies and equity sponsors drive value in restructuring and turnaround scenarios across the Consumer Products, Retail, Restaurant, Distribution/Transportation, Real Estate, Construction, Government, High Tech, Services, and Health Care industries. Read more
Senior Managing Director
Keith is a Senior Managing Director in Accordion’s Turnaround & Restructuring practice with over 30 years of diversified business experience. He plays a key role in the delivery of the firm’s service offerings across financial restructuring, transaction advisory, private equity, M&A/transaction services, sell-side advisory, interim management, PE portfolio optimization, and PE subsidiary company performance improvement and restructuring. In this role, Keith has worked with key partners that include Marblegate Asset Management, American Capital, Fortress, Apollo, New Mountain Capital, Littlejohn & Co., and Prudential Capital Partners in portfolio company strategic, operational, and financial restructurings. Read more