These changes are all part of the deal. “It’s sort of like you’re getting married, in a sense,” Pennett says. “You have to get buy-in on many different levels.”
A private equity firm may expect this level of oversight even if it hired the CFO itself. Scott Kantor is the former CFO at Advanced Health Media, a regulatory-compliance-management-system provider. In 2011, Arlington Capital Partners hired him to replace AHM’s previous finance chief. (In 2013, he left AHM to become finance chief of Picturehouse, a film production and distribution company owned by marketing and distribution executive Bob Berney. Kantor has since left Picturehouse.)
When Kantor became CFO at AHM, he learned that “the previous management team wasn’t providing the type of information on a regular basis that the PE firm, which was in essence the board, required,” he says. Representatives of the owners regularly asked him for metrics he was not used to sharing outside the C-suite. “They were asking for stuff that management needs to manage the company, not what the board needs to provide oversight and governance,” he says. At quarterly board meetings, the firm wanted to see 30 or 40 slides showing metrics that management used to make decisions.
“I’ve been the CFO of public companies, private/founder-run companies, private-equity-owned companies, and one public company where the founder was still the CEO,” Kantor says. “I’ve run the gamut of types of ownership. And I have never seen this level of detail discussed at a board level. We were literally going through metrics page by page.”
Kantor says he doesn’t blame Arlington Capital Partners for its diligence and that he liked working for the firm. But the experience taught him a few lessons. The first: set a threshold at which management should run decisions by the board. In AHM’s case, that was $250,000. The other was to be forthcoming, especially about bad news. “Their requirements grew less and less onerous as time went on, because they knew if something went wrong, I was going to tell them,” Kantor says. “When something came up, we would communicate that to them. So we earned their respect along the way.”
Still, Arlington Capital Partners interviewed and hired Kantor. The relationship between private equity owners and management might be more tenuous if a CFO was on board when a PE firm bought the company. Can CFOs of struggling turnaround expect to keep their jobs if a private equity firm takes over? Maybe, but there’s a good chance they won’t. “It’s usually that a private equity firm is coming in because the company is in a certain part of their life cycle,” Pennett says. “So it’s a turnaround and they want to bring in a turnaround guy or it’s a growth story and we’re gonna bring in a guy who knows the markets better.”
The CFO can also end up being the “fall guy,” Pennett says. “It’s like what you see in sports sometimes. We can’t fire the general manager of the baseball or football team. That’s like the CEO, who is oftentimes one of the original founders of the company. And everyone is wearing jerseys of their favorite Buffalo Bills players, so I can’t fire all 53 players [employees]. But CFOs tend to be more like the coach. I could fire the coach.”
CFOs may also be a target because they have to deliver the bad news, saying “‘we missed the mark,’ ‘we need more money,’ ‘we didn’t meet our bank covenants,’ or ‘we don’t have any money to make distributions,’” Pennett says.
There’s no hard-and-fast rule for the length of time finance chiefs have to prove their worth, but the most important metric for proving themselves is EBITDA, Pennett says. “If there’s cash flow that’s being generated, that means the private equity firm is entitled to have some portion of their debt repaid,” he says. “They want to be able to see the company is healthy and that they don’t have to put up any more money to [keep] the ship from sinking.”