have them prioritize operational matters. The new CEO must get thoroughly up to speed on the direct reports and learn if they also have any skin in the game. Inheriting a strong staff is very fortunate, but keeping them in the company is a CEO’s imperative. I have found staff equity ownership helps them remain on board. I have been a witness to many lucrative liquidity events at the company’s exit by our hired senior executives.
One interview question that frequently arises is: what would the new CEO do in his first month on the job? A new CEO’s early priority is visiting the company’s most important customers with the VP Sales and Marketing. The new CEO should also schedule visits to all the company’s plants or facilities as soon as possible with the VP Ops or Chief Operating Officer (COO).
Skin in the game CEO prospects should realistically evaluate themselves in terms of whether they can do the job well and what perceived shortcomings they might have versus the PE firm’s specifications. Most hiring authorities (in my over forty years of headhunting experience) are unduly influenced by grading the CEO candidate compared to the job specs. Proven CEO prospects lacking an MBA often are thrown out with the bath water. Be prepared to contend with this issue and overcome it effectively by discussing your advance educational credits, specialized training certificates, and your expertise. If you firmly believe it, state that you feel you can land on your feet running in the CEO job and bullet point why you feel that way.
Stress your proven track record and value with specific facts and be prepared to furnish a supportive reference name or two. Some qualification deficiencies are almost sure knockouts, such as the company having plants in Asia and the CEO prospect having no Asian operation management track record. Not every CEO candidate has global management experience, however.
Similarly, it is desirable if a CEO has multi-location facilities management experience, especially if there are integration possibilities. The SITG CEO and all skin in the game senior executive candidates who encounter job openings at PE firm portfolio companies should email their resume to the firm if they feel qualified to pursue any verbally described open CEO position. Next, request a copy of the CEO requirements or other senior functional titled job specs as soon as possible. Then break the job requirements into “must haves” versus “preferred items”. List the must have requirements and rate your own qualifications between one and ten.
If you survive your initial job interview and mutually remain a candidate, sign a non-disclosure agreement (NDA) and request a copy of the company’s offering memorandum, usually written by the investment banker of the company’s former owner. It details the company’s financial track record, describes the business, and identifies their customers/clients. This memorandum is vital to your overall due diligence effort and is what the PE firm used as part of their due diligence effort before acquiring the company.
The above criteria for CEOs of PEG’s portfolio companies in the aggregate are overwhelming, but it is unlikely that any SITG CEO candidate has mastered them all. I am providing a pattern of similar traits and requirements to help candidates with hiring aspects particular to SITG CEOs.
What do PEGs seek in their portfolio company CFOs?
What attracts CFOs to PE owned middle market portfolio companies? Why are they willing to invest $60K to $100K and sometimes more of their own money in the equity of their next employer? Simple answer: risk and reward. What is the typical CFO position like? Exhilarating and exhausting.
The newly hired skin in the game PE backed portfolio company CFO must get up to speed with the private equity agenda and quickly get a good handle on the complexities of the company’s debt agreements. From day one, it’s about the CFO building trust with the PE owners, the CEO, the banks, and any Limited Partners who typically are also board members. Building trust with the management team is almost as critical.
The competent and proven CFO is required to have the unquestionable traits of integrity, expertise, skills, and convictions to challenge the portfolio company’s CEO and management team on key strategic and tactical decisions. The private equity environment revolves around the PE Partners craving a unique dashboard highlighting cash flow, margins, and leverage ratios. PE ownership believes that numbers speak louder than words. A CFO should fit the PE firm’s strategic plan profile. Those CFOs heavily experienced in organic growth are better at performance management and containing costs. If the strategic plan is heavily M&A focused, the preference would be for a CFO with significant transactional experience and industry insight. A CFO with heavy turnaround experience or consolidation expertise, who is helping businesses get ready for sale, would not typically be ideal for a company facing a dynamic growth situation.
A CFO needs a balance of technical and leadership skills. Their responsibilities can span strategic planning, analysis, preparation, and presentation of monthly financial reporting including:
Generally Accepted Accounting Principles (GAAP) financial statements
Bridges
Key performance indicators
Weekly rolling forecasts
Budgeting
Credit, collections, and cash management
Financial and tax audits
Policy, procedure, and internal controls
Compliance processes
Cost accounting (standard and average costing)
Product costing
Capital expenditures/depreciation
Contract review
PE partners are hungry for details and fussy about presentation. The typical CFO mantra is, “No shocks, no surprises.”
The CFO is responsible for compiling the numbers; they better be accurate! Expectations are usually high, demands from constituencies countless, and tight deadlines numerous. The typical CFO must be a “stand up” executive, impartial and passionate, even ruthless when necessary. The CFO reports directly to the PE firm Managing Partner with a dotted line to the company CEO. CFOs are the main conduit of information flow to the PE ownership and the company CEO. He often has to balance completing the priorities of the PE ownership and the company’s management team. This balancing act can be especially difficult if the business is performing in a downward trend.
The PE ownership often puts the CFO on the spot and asks the CFO’s opinion about the portfolio company’s tactical plans to increase the top line and the company’s chance of success. In a middle market portfolio company, it is rare that a controller is promoted to CFO because it would be on the job training. However, M&A expertise is not always required of the CFO since the PE firm typically has that expertise. However, past experience with integrating acquisitions in partnership with operations is valuable. Familiarity is beneficial with IT systems, processes, and controls, particularly Enterprise Resource Planning (ERP) software implementation.
CFOs typically know how the entire day-to-day company works and how the various departments fit together. The CFO is continually involved in operations and is seen as the non-stop furnisher of their financial data requests. He projects a sense of urgency and surrounds himself with passionate “all hands on deck” subordinates. The CFO typically needs a strong experienced team including a solid financial controller to help maintain control over the financial function and enable him to deal with wider issues and requests. Hiring, managing, and retaining solid subordinates is typically a major challenge as the CFO will surely fail without adequate direct reports. The CFO’s leadership approach creates an open, collaborative
