Privcap recently released a video of private equity professionals discussing the importance of having good finance talent within portfolio companies. You can see the video here. We have previously talked about the importance of financial reporting, but Privcap makes a good point about the importance of having finance talent. For most private equity firms financial information is the lifeblood of the business. At Hadley Capital, our first choice would be to retain the existing controller of CFO. Our evaluation process typically works something like this:
1) Working with the controller during due diligence and closing.
During this time we get a pretty good understanding of how the company currently is managing its finances. We see their monthly reports including – income statement, balance sheet, accounts receivable aging report, accounts payable aging report, and pipeline reports. At this stage, we are evaluating how accurate the reporting is, what information the controller is tracking and what kind of ability the company has to create useful financial reports.
2) Working with the controller post closing.
Post closing the monthly financial reporting requirements typically change for the controller in a couple ways. First, financials are typically required within 30 days of month end. Previously the company may have been more lax on the timeliness of reporting. Now not only Hadley Capital, but also the lenders require the financial information on time. Second, the controller will also often have to provide new financial reporting. For example, quarterly financial covenant calculations will likely be part of the new financing agreement. We work directly with our controllers during this time to make sure they understand what kind of information we need and why we need it.
Usually within 90 days of closing we have a pretty good feel for the capability of the controller. In many cases the controller has the necessary skills to take on the additional financial requirements. If not, we will either a) work with the controller to acquire new skills or b) make the necessary change to find a new controller.
Getting the finance team right is an important first step in professionalizing a small business and it is one of the the things we like to work on with our portfolio companies.