Working with private equity investors for the first time can feel a little overwhelming, but the ultimate result is hugely rewarding. While everyone is ambitious for their company, private equity investors inevitably look at things through a different lens to the management team. They will be supportive, but they may put new processes in place in order to drive a good exit outcome for all parties. For example, they may require more granular and bespoke financial performance monitoring and reporting.
It is up to the business’s CFO to deliver on this. In addition to accurate and timely monthly management information, private equity investors will often require additional data that can be mined for actionable insight. They will look for robust forecasting, with early warnings of any divergences. And they will need a detailed analysis of the business’s costs, as well as its debt management, liquidity, and cash-flow.
This new way of working can represent a step-change for many CFOs, and it is important that their finance departments can deliver. The processes of many family-owned and owner-managed firms will often have been very different, with limited performance monitoring and no requirement to account to other stakeholders.
Such businesses may be working with financial systems, processes and technologies that are not capable of delivering the data and analysis that the private equity investor requires and expects. Legacy IT systems are often basic and sustained through manual interventions.
Securing a platform for growth
How then, do CFOs in PE-backed businesses meet this challenge?
Well, simply throwing more people into the finance function to manage the increased workload would be to plaster over the cracks – and unsustainable in the medium to longer term. Instead, more fundamental change is required: within the first 100 days of working with the private equity investor, the CFO needs to make a comprehensive and honest assessment of whether the existing financial systems and controls are fit for purpose in the new ownership structure.
The advent of cloud-based technologies, often with a monthly subscription model, makes it possible for businesses to implement sophisticated finance and enterprise resource planning (ERP) systems with very little upfront cost. Such systems can be deployed far more quickly than ever before and once in place can save considerable time.
Making this change is a golden opportunity to establish the private equity-backed business on a platform that can support rapid and sustainable growth. It provides the CFO with a means to meet investors’ demands and, more importantly, with the tools to drive improved performance.
The key is to choose the right system, based on the business’s needs in a range of key areas. These will include:
Cloud readiness. Shifting finance and ERP systems on to the cloud often feels like a big step, with anxieties about connectivity and data security, but the advantages are considerable. A monthly subscription reduces or wipes out upfront investment costs as well as ongoing bills for upgrades and new launches. It provides secure off-site data back-up. And it gives the business a means with which to evolve its systems as its needs change.
Flexibility and scalability. Private equity-backed businesses are typically aiming for fast-paced growth, so an ERP platform that can scale at the same pace is vital. A system that caters to multiple entities in multiple markets may not be necessary on day one but having the flexibility to incorporate such functionality over time is important.
Integration. In upgrading its systems and controls, it is likely that the business will retain at least some of its existing technologies, particularly in areas such as payroll and HR. The new platform needs to be able to integrate with these systems, providing a level of automation that reduces the need for time-consuming and error-prone manual interventions to a minimum.
Quality of outputs. CFOs charged with providing investors with high-quality data and analysis will need an ERP system that delivers this. Some platforms offer a sophisticated out-of-the-box reporting system that may require little or no customisation. The analytics tools on offer may enable CFOs to drive much richer analysis of existing data.
Efficiency enablement. An ERP platform with automated and embedded workflows should enable the business to secure substantial efficiencies compared to legacy systems requiring much more manual management. This should free up staff to focus on more value-adding activities.
Industry expertise. It makes sense to select an ERP partner with experience and expertise in the business’s sector or industry. IT providers with an instinctive understanding of the business’s challenges, pain points and opportunities will naturally offer a better fit.
With the right platform in place, the CFO of a private equity-backed business will be able to deliver on what its private equity investors require to take the business to the next level in its growth. But more fundamentally, the platform can drive a change in culture across the business, moving every department towards a more structured and focused way of working.
Managing such a large-scale change project will be an important challenge in its own right, but the opportunity is to deliver the right results for all concerned. With the interests of management, investors and stakeholders aligned from the start, the CFO and his or her colleagues can focus on the growth agenda.
If you would like to learn more about the challenges a PE-backed CFO faces, then please read the CFO to CFO whitepaper I have written, which gives advice on addressing some of the key risks at the outset, maximising exit readiness and establishing a platform for growth.
I am also presenting ‘A high growth SME case study’ at an SME briefing in Glasgow, 13 June, in collaboration with Clydesdale Bank and BDO. Registration details here.
Alternatively, contact me at firstname.lastname@example.org