Private equity firms have a reputation. Like most investors, they want to make money. When they buy a company, they often cut costs, lay off employees and hire new managers. So when you’re the CFO, and a private equity firm buys your company, what should you expect?
The answer may depend on the health of your company. Paul Sherman, CFO of contact lens distributor ABB Optical, has worked for several private-equity-owned companies and says he has had positive experiences with all of them. PE firm New Mountain Capital bought ABB Optical in 2012. “In our case, we were a growing, profitable, very successful company that New Mountain [was] choosing to invest in because of our growth and because of the management team,” Sherman say. “So it’s been a fantastic relationship.” But “it’s very different if a private equity firm is buying a struggling turnaround, because, obviously, then they have to strongly consider the management team and maybe bring in different people,” he says.
Whether or not your company is in high-growth mode, working for a private-equity-owned firm will likely be an adjustment. CFOs are used to steering the finance department without much interference, and PE firms may get more involved in day-to-day decisions than a finance chief would expect.
CFOs of private-equity-owned companies should make peace with the fact that the PE firm is going to be involved in the budgeting. “There’s a very rigorous budgeting process that private equity firms ask management to do,” says John Pennett, partner-in-charge of the life sciences and technology groups at EisnerAmper, an accounting firm. “If you need to spend money on marketing and R&D or product development, the private equity firm has to buy into that, because it’s their money.” Finance chiefs should be ready to communicate a well-thought-out plan with the private equity firm, just like they would with the board of directors. “You have to convince them that if we invest in these areas, we will get some sort of a return that we’re expecting,” Pennett says.
It’s not enough to allow PE firms a hand in the planning process. CFOs also need to perform up to the standards of the plan, Pennett says. If the management team convinces the PE firm to spend money so the company can grow 20 percent in international markets, the CFO should provide regular performance metrics that show the company is on track. “You put a lot of your personal capital on the line to get your budget created and approved,” he says. “If the company is struggling to execute against that, you’re going to give up some of that personal capital with the private equity firms.” Private equity firms may also control compensation, linking management incentives to whether or not the firm hits its sales growth goals, for instance.