Every private equity shop has certain policies and procedures that go along with introducing a new member to the team. When that shop is a small or middle market firm and the new person is head of finance or operations, however, the transition process can be a complicated and time-sensitive one.
Large buyout shops typically have the cushion of an extensive in-house finance staff to soften the blow of a leader’s departure. Smaller firms – where finance and operations can be a one- or two-person unit are much more vulnerable when the position is vacated. In those instances, a firm’s biggest asset can be the outgoing CFO.
“It’s a complicated migration every time,” says Roy Kelvin, current chief financial officer at GI Partners. “Having the outgoing CFO as an interim resource makes the job quite a bit more manageable.”
Despite the unique circumstances at each firm, success in handing over the reins to a new finance chief hinges on two factors: who is involved in the changing of the guard and when that change occurs.
The predecessor factor
Kelvin started at GI eight months ago. Shortly before his arrival, the firm had moved its headquarters from Menlo Park to San Francisco – a contributing factor in his predecessor’s departure. Luckily, the amicable relationship between the former CFO and the GI team ensured that Kelvin was able to overlap with the prior CFO for a few months, which proved to be valuable time to learn many of the ins and outs.
Stephen Hoey was in a similar situation when he began his duties as CFO of KPS Capital Partners 11 years ago. The firm’s controller had recently left, so Hoey brought along his own controller to the job. With two new finance executives and a second fund on the brink of its final close, KPS retained the departing CFO as a consultant for a few months.
“It’s very important, especially if the outgoing CFO is in the process of finding something new, to have a tail agreement so they have motivation to help the firm succeed,” adds a third CFO who recently began his position.
That outgoing CFO can provide an issues list with the top priorities the firm needs to accomplish. Although the goals of an incoming CFO may differ, the list will help the new person to get the lay of the land.
At the top of that list should be the results of the firm’s last SEC or FINRA audit, which the incoming and outgoing CFO should go over together straightaway, notes Kelly DePonte, managing director at Probitas Partners.
“You have to know what happened the last time around, what those weaknesses are and where the firm is in the process of identifying those weaknesses,” he adds. That especially holds true for firms where the CFO umbrella encompasses compliance as well.
Of course, not every firm has the luxury of keeping on a departing CFO. If that CFO is fired or heading to a competitor, there are still ways to assure a stable transition. For smaller firms, it’s a help that many outsource accounting and reporting to third party service providers, so the continuity of those functions will not be disrupted.
The controller is also a major asset during the onboarding process, however, as Hoey experienced, the controller will occasionally leave the team as well. One option in that scenario is to reach out to an auditor for advice and pay consulting fees to have the audit team work with the incoming CFO so that nothing falls by the wayside, says DePonte.
“If there is some sort of problem with bringing someone on board and it begins to delay or affect quarterly reporting that’s going to catch investors’ attention.”
All in the timing
Depending on the time of the year or the quarter when a CFO starts, a shift in leadership could significantly affect the firm, The third CFO notes that he once began a position in November, which was particularly difficult given the amount of end-of-year work to be done.
“You’re never lucky enough to choose your own timing,” he says.
Firms, however, should be advised that hiring someone early in the quarter is usually a good bet for a smooth transition, especially if the departing CFO is staying on to provide training and oversight through quarter-end. The new finance head can receive the guidance necessary to get through the three months and then close out the quarter, usually a 30 to 45-day process.
“There are also some things you only do once per quarter and those are some of the key things you want to have them do and have covered,” adds DePonte.
Still, a CFO’s duties vary each quarter, and there is much to learn after those initial few months. Multiple CFOs say you’re only fully settled in after you’ve gone through a full year’s cycle in order to experience the end-of-year review process, the annual investor meeting, budget meetings with portfolio companies, the bonus period, and other yearly happenings.
“It really takes a full year,” adds Hoey. “You can’t go back to review how you handled something last year, and all the while you may be tweaking things and putting your stamp on how things are done.”
Kelvin agrees, saying that although he feels he is finally settling in after eight months, he wants to wrap up four full quarters before will say he’s fully acquainted at GI. “My benchmark for myself is about a year and half,” he says.
The dos and don'ts
Our experts advise on the make or break moves for an incoming CFO
DON’T: Start on a Monday
Monday meetings are typical at most firms, but if you’re a new CFO, going into that first meeting blind may present a “whirlwind of confusion,” says the third CFO. He suggests starting on a Friday so that you have a day to meet everyone. Pick up a copy of the LPA and other key documents to look over during the weekend so you can figure out what’s expected of you come Monday.
DO: Get to know the key players
Meet with the firm’s service providers, audit professionals, tax team, fund formation attorneys and IT professionals. “Building strong long-term relationships is crucial to our business, and it is hard to do that via phone or email,” adds Kelvin. “Invite your providers to the office, or find another way to meet in person.”
DO: Ask questions
If you’re moving into a position where the last CFO was fired, be sure to find out what you can do differently, notes Hoey. “Look for cues and ask a lot of questions of the managing partners: where did the other person fail? What do I need to focus on? What needs to happen that wasn’t happening before?”
DON’T: Come in like a bull in a china shop
It may be tempting to start implementing new projects and putting your own stamp on processes, but it’s best to wait and get the lay of the land first, notes Hoey. “You may come in with all new ideas, but you have to be sensitive to people who have gotten used to the way things are,” he adds. Make changes gradually unless the managing partners ask for more, especially if you’re joining a firm where a longtime CFO is retiring.
DO: Get your calendars in order
Make sure to set up all your calendars early, with dates for LP deadlines, audit deadlines, tax deadlines, deal closing deadlines and even wish list project deadlines, like when to implement a new expense reporting system. “Get those deadlines from the outgoing CFO and talk through them with the controller and tax professionals,” says Kelvin. “Much of your success or failure in your new position hinges on meeting your deliverables.”
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