Considerations for CFOs when working with portfolio companies

Blog / MEDIA: 5 key considerations for CFOs when working with portfolio companies

Private equity deal-making reached historic heights in 2021, breaking annual records in both volume and value with nearly 2,900 transactions comprising $438.6 billion. While there are some headwinds in 2022, the fundamentals remain in place for a strong year. The historically favorable credit market continues to enable investors to borrow more money, reducing the amount of equity needed to enter transactions with more capital available to invest than ever before.

Business trends indicate, an increasing number of companies are becoming first-time private equity portfolio companies and portfolio company CFOs are struggling with the nuances. Here are some ways CFOs who are new to private equity can shift from “feeling green” to “feeling great” with private equity owners.

Learn the reporting guidelines and deadlines

It is important to get up to speed quickly on reporting guidelines and deadlines. Lenders and investors tend to have very specific reporting expectations and take deadlines seriously. This is an adjustment for greener portfolio company CFOs, who may have more to-dos than time to get them all done.

The good news is the list of challenging areas of accounting is finite, and there are great tools and resources in the marketplace to help. CFOs should work with advisors who are available to support the needs of a portfolio company and have private equity experience to help guide through any questions that arise.

CFOs should also set realistic expectations with lenders and investors, who are facing many of the same challenges and should understand the impact current economic conditions have on meeting compliance requirements.

Understand the importance of data security

While cybersecurity is a hot topic, many companies have not prioritized data security unless it was forced upon them. Times have changed. Today, everyone – especially CFOs of portfolio companies – should be thinking about how to secure data and what to do in the event of a breach.

How would you sustain operations if your systems were compromised? Is the company’s insurance strategy keeping up with risk? Odds are a significant number of companies will be affected by a cyberattack in the near term, so make sure you are paying attention. You don’t have to be an expert to have effective boardroom conversations about your cybersecurity program.

Expand beyond single service revenue

While many historical PE investments were made in companies with a single revenue source, product or service line, diversification is the name of the game today. Portfolio companies need to look substantially different when PEGs exit than when they invested. Expanding into different service or product lines through add-ons allows portfolio companies to reach more customers, resulting in a more diversified revenue base.

We are seeing portfolio companies developing and integrating niched technology solutions that will not only broaden the opportunities with current customers, but also attract competitors’ customers by having integrated solutions to address industry-specific needs.

Be aware of the far-reaching supply chain impact

At a macro level, risk is different today than ever before. During COVID-19, the primary risk was the direct impact of a global pandemic on the top line. Today, supply chain issues are impacting access to talent, materials, and goods, which are collectively limiting the ability to generate revenue. I would encourage portfolio company CFOs to think about the supply chain more broadly.

A manufacturer’s CFO certainly understands the flow of materials and the need for labor, but all CFOs should be thinking specifically about their finance and accounting supply chains by cross-training team members, streamlining processes and identifying fallback plans in the event that any further shutdowns are imposed or primary resources are unavailable.

Gain different skill sets and perspectives

Some of the best CFOs in their particular industry niches will have to adapt their skills to be accretive in a portfolio company’s diversification strategy. Greener CFOs should go out of their way to stay flexible and find peer CFOs in these “add-on” target industries. Networking with them can provide a better understand of the challenges and competitive landscape that may be faced through diversification. Talking to accounting, legal and other service providers about their experiences in these industries is also beneficial.

Whether you are a CFO who is new to private equity or an experienced portfolio company CFO who feels green again because of the “new normal” in our world, take some time to:

Revisit efficiency and communication in meeting your reporting requirements.
Move data security up a spot or two on your to-do list.
Stay flexible and be prepared to handle diversification strategies.
Shore up your supply chain.
Expand your skill set.

2022 is a pivotal year for CFOs with many challenges to navigate including the nuances of private equity. The concepts above can help you get well on your way to a path of success.

LBMC understands that challenges are inevitable at every stage of a private equity investment, and our business services are crafted to meet those business needs, however unique they might be. We have services and expertise tailored precisely for private equity organizations and related portfolio companies using our centralized model. Let us know if we can help.

Matt Smith is a shareholder in LBMC’s Audit Practice. He will be co-leading LBMC’s CFO Bootcamp in July and can be reached at matt.smith@lbmc.com.

Original Post on Nashville Business Journal

Learn the reporting guidelines and deadlines

Understand the importance of data security

Expand beyond single service revenue

Be aware of the far-reaching supply chain impact

Gain different skill sets and perspectives

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