Finance Transition for Middle Market and First-Time Sponsor-Backed Companies
Our Ankura Office of the CFO® professionals have worked inside finance functions of private equity (PE) and private credit-backed portfolio companies to build, carve out, stand up, merge, save, optimize, restructure, take private, or prep for sale. We have seen and experienced it all…and have learned some valuable lessons in the field.
A major theme we uncovered is that most middle-market and first-time sponsor-backed companies are just not equipped for new and more dynamic PE ownership. The transition is very difficult to manage at the rate of change needed and improving on the “current state” requires a focus on four major areas:
- Focus on people and attracting and retaining high-caliber talent
- Streamline first then invest in lightweight technology infrastructure
- Upgrade skills to support mergers and acquisitions (M&A) growth strategies
- Develop the platform to meet the demands of PE ownership
These deficits are partly due to a lack of bench strength, access to talent, and foundational investments (systems, data, and people), but mostly, it is the shift to a “cash first” organization that is too slow and incomplete. Compounding this, companies commonly get the wrong advice and fail to focus on the important elements of transitioning to operating under leverage and serving a wider set of stakeholders. Instead of smaller, executable building blocks, companies engage in large, multi-prong, multi-work stream, multi-stage projects that are costly, slow, and increase in scope and complexity.
The First Building Block
Companies often overthink the solution. Middle-market and first-time sponsor-backed companies need a building block approach that is quickly executable, with simple but impactful design elements that integrate critical data and use low-code or no-code business intelligence solutions. The output might start or stay in spreadsheets but can be easily converted into one of many data visualization tools and quickly start producing the required output.
Private equity and credit stakeholders support these quicker transition efforts because the output avoids large system upgrades, leverages off-the-shelf solutions, is executed in weeks not months, and delivers to sponsors and creditors the information they need on a real-time basis. The first building block is to produce essential reporting, including:
- Liquidity monitoring
- Management, Board, and key stakeholder reporting
- Opening balance sheet
- Monthly close improvements
- Budget and forecasting
- Net working capital performance
If properly implemented, the company is set up for further success by moving toward these standard functional baselines:
- Position for growth and value creation through data-driven decisions
- Create a stronger financial planning and analysis stance
- Establish and maintain credibility with all stakeholders
- Instill confidence through message clarity and consistency
- Enable a quick, efficient, confident close process
Adding More Blocks
After the first block is in place, management can then start to think, react, and make decisions through a data-driven and cash-creation lens. Chief Financial Officers (CFOs) can also begin to focus on adding incremental building blocks that are tailored to their sector or unique business needs. This is the time to start asking questions:
- Do we have the right resources in place to stretch the team to take on the change ahead?
- Do we have a strategic roadmap with stakeholder buy-in?
- Does the investment thesis continue to support the new leverage model?
- Will cash flow from operations support the new debt service payments?
- Is the accounting and reporting infrastructure in place to meet new reporting rigor and speed requirements?
- Do we have the right key performance indicators (KPI), management reporting, and financial models to support quick decisions and long-range strategy?
- Can we produce and communicate output data efficiently?
- Are the right people with the right skills in the right roles?
- Do we have the appropriate data environment and systems to effectively meet current operational requirements and scale for growth?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
