This is Part 2 in a SkyWater Search Partners Private Equity series
As a headhunter specializing in Private Equity portfolio company placements, I’ve learned that PE-owned companies are the Land of No Middle Ground. Senior executives love working there… or they hate it. They crave a break-neck pace and intense pressure… or they are crushed by it. No middle ground. The problem? The potential benefits of working with a PE-owned firm are tempting. Powerfully tempting. And these temptations can sometimes lead candidates to tell themselves (and tell me) that they would thrive in the PE environment, even when the truth is, they will not.
If you’ve been looking at a CFO position at a PE-owned company, here are 6 things you need to understand about Private Equity partnerships and the companies in which they invest. Not every highly talented CFO can succeed in this environment. (I would argue that most cannot.) Pursuing that CFO job could be the smartest – and most lucrative – decisions you’ll ever make. Or, you know…
Often, small to mid sized companies find themselves at a financial crossroads. Maybe they have a solid value proposition, reasonable infrastructure, and the potential for dramatic growth – but lack the funding necessary to invest in that growth. Or, maybe an unforeseen hardship has pitched a previously promising company into a period of uncertainty. Whatever the reasons, companies in need of a significant cash infusion often turn to private equity (PE) firms for help. If the PE firm sees the potential for an acceptable return on their investment, they buy the company – with the intention of making whatever changes are necessary to profitably sell the company (whether through private sale or IPO) within a very short timeframe (often 3-5 years). If you remember nothing else, remember this: it’s all about Value Growth. The PE investors bought the company not because they have a passion for the widgets or gadgets or cupcakes that it produces. They bought it because they have a passion for buying something of value, transforming it into something of far greater value, and selling it for a hefty profit. They bought the company with one goal: a near-term sale (“liquidity event”). And they expect the leadership team of that company to make whatever changes are necessary to ensure a successful sale.
This is company flipping. Again, the investors didn’t buy the company to keep it the same. They bought it to change it and sell it. These changes often demand dramatic philosophical alterations at the leadership level. If the investor team finds the CEO unable or unwilling to drive the kinds of changes necessary, they may ask them to stick around as consultants or investment partners. But they hire a new CEO. Likewise, if the CFO doesn’t prove to be the hard charging, bottom-line-focused, change agent they need, they replace them. If you’re interviewing for a CFO position at a PE-owned company, that’s probably what happened to the person you’re replacing. And unless you’re comfortable with being the next casualty, read on, to be sure you understand the pros and cons of the job.
Although there are many benefits to this job, compensation is a huge attention-getter. While not always true, the fact is that most PE-owned firms offer better comp packages than others. Why? Plenty of reasons. But in a nutshell, this is a risk-reward scenario. Taking this job means taking on risks, lots of them. (Keep reading.) You’re being asked to jump onto a team and help lead it through turnaround and/or rapid growth. You may fail. The company may fail. But if you succeed, you reap the benefits of that success, financially. You may not get a bigger regular paycheck than your CFO peers at similar, non-PE-owned organizations. (In fact, you may get a smaller one.) But you can expect your variable pay in the form of incentive compensation, such as stock options. If you negotiate your contract appropriately and you make it to the finish line – the big sale – you will be a happy participant in the corresponding wealth event.
You’re not there to count the beans. Yes, you will have to establish and maintain absolute credibility of the numbers. But this investment team will look to you as a critical strategic partner to the CEO as well as the investor team. You’ll be expected to have strong opinions on what the numbers suggest about the future and what the company can do to exploit all opportunities. And you’ll be expected to voice them. The team will lean on you for creative ideas and total command of the facts. You’ll discover that there are very few bureaucratic obstacles to making recommendations or leading initiatives to eliminate organizational weakness and maximize potential. And if your ideas and efforts consistently succeed, you make a name for yourself, paving the way for future, lucrative opportunities.
Remember the timeframe I mentioned, above? Now stop and think about how very, very little time 3-5 years is for a leadership team to radically increase the value of a company. We’re not talking about incremental improvements. We’re talking about growing the company two-fold or larger. We’re talking about driving EBITDA up, way up. That means you’ll likely be making changes to staff, investing in new systems. And when I talk about a great communicator, I don’t just you need to turn a nice phrase. I mean you’ll need to manage banker relationships whenever the need arises, participate in discussions with potential buyers and, through it all, possibly be on call, 24/7, for questions from the investor team. For some candidates, the idea of working under those pressures is thrilling. For most, it sends chills down their spine. It’s just not everyone’s idea of a good time.
As CFO, it’s your job to relentless prepare for a timely, profitable sale or IPO of the company. But you need to understand, going in, that the glorious payout could well accompany a pink slip. Seriously. If you did everything right, it likely means you’re a great CFO for a PE-owned company. You may not be the ideal candidate for the kind of company you just built. Success often means that you worked yourself right out of a job. And you need to be okay with that.
If you have experience working in the environment we've just described, we would love to hear from you. Leave a comment below to contribute for our readers.