Episode 004
How to Hire a Private Equity-Grade CFO
In this episode, BluWave Founder and CEO, Sean Mooney, describes the importance of a great CFO for both PE-backed companies and independent companies alike. Hear the benefits that a PE-grade CFO can have on your organization.
EPISODE TRANSCRIPT
Sean Mooney (00:07): Welcome to the Karma School of Business podcast. This episode is brought to you today by BluWave. I'm Sean Mooney, BluWave's founder and CEO. BluWave is an Intelligent B2B Marketplace that is trusted by more than 500 of the world's leading private equity firms and thousands of proactive companies, connecting them with the very best third-party resources they need to expertly assess opportunities and build value in their companies with speed and certainty. During this episode, we're going to talk about how every company can successfully hire a private-equity-grade CFO. Enjoy.
(00:45): In my mind, the CFO is one of the most important, and also hardest roles to excellently serve in a company. CFOs are the ultimate super-connector in any organization. Great CFOs are able to accurately capture all the relevant information in a business, elegantly report what happens, understand why it happens, and seamlessly share insights across an organization regarding what will happen under a variety of circumstances. As we all know, this is no easy task. A CFO must be detail-oriented and analytical. They must be socially adept to gather and share insights across an organization. They must be a strategic partner to the CEO. They need to be able to thoughtfully say no and creatively find ways to say yes. In short, a great CFO is a unicorn. Every company needs and should have a great CFO. They're very hard to find and can be even harder to assess while recruiting.
(01:45): Over the course of my nearly 20 years in private equity, I learned every lesson about hiring CFOs the hard way, and probably learned every lesson at least twice. At BluWave, interim CFOs and specialized CFO recruiter needs regularly top our PE firm request list league tables. So the top business builders in the world are also always looking for these unicorns. The genesis of my interest in CFOs started in my earlier days as a private equity investor. During the first phase of your career in PE, you often focus on understanding the elements of value that lead to a great company. As a PE professional grows and develops, it not only becomes about the what’s and why’s of companies, but also the who's.
(02:30): When I became a VP, I started being tasked with leading the recruitment and vetting processes for portfolio company CFOs that I was involved with. At first, candidly, I was terrified. What did I know about hiring a C-level executive? My experience thus far was in investment banking and private equity investment analysis. So the way I did it, when I was first asked to start doing it, was I would interview the entire market each time. After meeting every candidate possible, through brute-force pattern recognition, I'd eventually figure out who the best one was. Twelve weeks later, I'd usually find out it was the second person I interviewed, the recruiter would throw up their arms, and then they'd start again because the one I liked actually just took another job.
(03:16): Those experiences led me down a rabbit hole of reading, research, and questioning lots of experts about how to do the process the right way. It started with reading some of the seminal research from Hunter and Hunter and volumes of follow-up work by other researchers, talking with more senior-level partners who had figured it out over time, talking with recruiters and also CFOs themselves. Eventually I figured out an approach that worked for me, and I've been refining it ever since.
(03:48): Research shows that the best way to assess candidates is a multi-prong, structured approach. Interviews and references by themselves are not predictive of future performance. I'm sure we've all seen this in our career. The best methods use a combination of approaches, including a structured interview where you ask the same questions to each candidate, personality trait and cognitive aptitude assessments, case studies, and references. It needs to be a mosaic, not a single-arrow solution. All of your findings should then be captured in a common scorecard, and with each segment graded to give you relative readings across candidates. Too often, I'd hire the person I liked the most versus the best person for the job. I'm sure this resonates with a number of our listeners as well. The structured-scorecard approach is going to increase your objectivity, it's going to improve consistency, and it minimizes bias during the process.
(04:45): Today, we're going to talk about some of these how-to’s and lessons learned about how to hire a CFO the right way. The most important step, hands down, is preparation. As Ben Franklin wisely said, by failing to prepare, you're preparing to fail. So take meaningful time up front to outline exactly what you need in terms of skills, competencies, values, and other key attributes. Then build a scorecard that you can use to measure each candidate objectively against this criteria. A quick piece of advice: A great book you can read to get started and help you think about how to do a scorecard-based recruiting process the right way is a book called Who by Geoff Smart.
(05:30): Next, embrace the fact that unicorns are not easy to find. My recommendation is to hire a specialized recruiter who focuses on CFOs. One of the very top use cases that private equity firms use BluWave for is to connect them with the very best CFO recruiter for the unique and specific needs of each company. My recommendation is to do as private equity firms do. The right great recruiter is worth the money, and it's going to make a world of difference in terms of quickly bringing great talent to bear. As a side note, think about selecting your recruiter the same way you'd pick a CFO candidate. Use a scorecard to measure a recruiter against your key criteria for the specific job you're hiring.
(06:12): At BluWave, we use recruiters from our vetted ecosystem for every major hire we make. Time and time again it's paid off. As candidates starts coming in, with scorecard in hand, assign different parts of your scorecard to relevant key team members so you can systematically measure candidates against each of your criteria while getting a range of inputs from across your organization. Also, be prepared to move candidates through your process quickly. Top candidates don't last long on the market. This doesn't mean you compromise on candidate quality. It means you move them through your process quickly and efficiently. Think about putting together almost like a Lean Six Sigma process that's going to be very efficient, lead to little variation, and optimize quality.
(07:00): This brings us to the key elements that a PE-grade CFO scorecard should have. Whether you're with a PE-backed company or not, my recommendation is to recruit a CFO with private equity experience. The PE industry trains and develops the top CFOs in the world. Find someone who's already had the training. This is particularly true if you're within the PE ecosystem. PE moves at a unique pace and has particular requirements. If you're not in the PE ecosystem, you're still going to reap all sorts of benefits.
(07:29): Next, look for candidates that have similar-sized company experience. Different-sized companies have different levels of materiality, team structures, support infrastructure, politics, accounting systems, practices and procedures… An upper-market CFO will naturally have a harder time with an SMB-sized company and vice versa. One set of experience is not better than the other. They're just different. Vet your CFO with regard to not only where your company is, but where it's going. If you're a 100-million-dollar revenue company, you're going to be 200-million, look for a candidate that has gone through that range of sizes of businesses. I've had so many failures trying to bring in big-name, large-company CFOs who just couldn't function at a lower-middle-market-sized company. It wasn't that they weren't great. It was that they just weren't a good fit for a smaller-company environment.
(08:20): Next, look for candidates who are also aligned by your type of company. If your business is a manufacturer, best to find someone with manufacturing experience. If your company's a software business, it's a lot easier to understand software operating models when you've already worked for one. You don't want to be teaching your CFO what customer acquisition cost and lifetime value of customers are and why they're important and how to calculate them.
(08:46): Next up, find candidates who have relevant industry experience. Different industries have unique nuances. You want as similar industry experience as possible. This is particularly relevant for regulated industries or those with more unique accounting needs, like project-based accounting, subscription accounting, complex activity-based accounting, et cetera.
(09:08): Capital structure is another important consideration. Look for candidates with experience operating under similar capital structures to make interactions with lenders and investors more seamless. This is particularly true when you think about having debt in the balance sheet, entering a public company operating environment. You should also be thoughtful about aligning compensation. Be careful about candidates who previously made meaningfully more than your target level. They may say that they're okay with taking a step back in comp. In my experience, rarely will a candidate take a meaningful discount and not start looking for the best next role sooner than later. You don't want to be a bridge to somewhere else.
(09:47): In this day and age, I'd also recommend you spend time up front making sure the candidate will be available during your timeline and that they're okay with any geographic requirements. At BluWave, time and time again, we've seen projects get down to the finish line and at the end of the day, they say, "Well, I'm not really ready," or, "We're not going to move our family," which is totally understandable, but make sure you know these answers up front so you don't waste a lot of time and effort.
(10:13): Next, make sure you study and understand a candidate's track record. Be aware of those with multiple short, zero-to-two-year stints. Be aware of large gaps in employment. Look for track records of being recruited to bigger and better next roles versus leaving roles without a bird in hand, and then candidates then needing to find jobs in between. If there were bumps in the road, that's okay. Life's not a straight path to Rome. Inevitably there are going to be twists and turns during someone's career. However, look for candidates to own the results and ultimately share what they did to take action and improve the situation. Be aware of candidates who repeatedly blame circumstance and fate. Look for those who take fate head on and do whatever they can to overcome it.
(11:00): Your scorecard should also include measures to assess candidates' acumen with budgeting and forecasting, data analysis, communication, persuasion, judgment, alignment with your culture and values (very important), and fit for your top strategic initiatives in the days ahead. I also recommend that you have your candidate perform a case study to see how they would work through a real-life business challenge, opportunity, or workflow that's germane to your role. You should also study the way that candidates think and key personality traits. There are all sorts of companies that have tools that can help you understand a candidate's personality and cognitive aptitude.
(11:37): My advice is don't overly index on these, though. They're part of the mosaic, they're informative, but they're not the end-all, be-all when recruiting a top candidate. Use these tools to identify meaningful disconnects. With this in mind, don't overly weigh your assessment on any one criteria. The key is to understand the person as a whole. Use your scorecard and see which candidate overall fits your needs the best. When you use a structured, scorecard-based approach that includes a comprehensive assessment of a candidate's competencies, skills, values, intellect, personality, and real-life case study testing, I think you're going to find that your success rates are going to go way up. And this is not only just for CFOs; it's really for any hire.
(12:20): If all this seems daunting, it absolutely can be. The private equity industry understands this better than most. To help them improve the likeliness of their success, they regularly use BluWave to connect them with expert hiring-assessment specialists to help them make the best decision possible. You and anyone can use BluWave to connect with one of these PE-grade experts as well. But you can also do it yourself if you prepare up front and systematically assess candidates against what you know you need.
(12:50): As part of our Karma School of Business approach, we worked with a number of our PE heads of human capital friends to upgrade my back-in-the-day method and have encapsulated all of this, and really more, into a representative PE-grade CFO scorecard, along with questions that you can ask to help screen for each of these criteria. If you'd like a copy, we'd be happy to share it. Please email info@bluwave.net. B-L-U-W-A-V-E.net. Ask for the scorecard, and we'd be happy to provide you a gratis copy. If you have any suggestions to help improve the scorecard, please also let us know, as we try to make it continuously better and better over time.
(13:31): Well, that's a wrap for today. I hope you find this helpful. Thank you for joining us. For more information, go to bluwave.net/podcast. Please continue to look for us anywhere you find your favorite podcasts, including Apple, Google, and Spotify. We truly appreciate your support. If you like what you hear, please subscribe, review, and share. In the meantime, let us know if there's anything we can do to support your success. Onward.
(00:45): In my mind, the CFO is one of the most important, and also hardest roles to excellently serve in a company. CFOs are the ultimate super-connector in any organization. Great CFOs are able to accurately capture all the relevant information in a business, elegantly report what happens, understand why it happens, and seamlessly share insights across an organization regarding what will happen under a variety of circumstances. As we all know, this is no easy task. A CFO must be detail-oriented and analytical. They must be socially adept to gather and share insights across an organization. They must be a strategic partner to the CEO. They need to be able to thoughtfully say no and creatively find ways to say yes. In short, a great CFO is a unicorn. Every company needs and should have a great CFO. They're very hard to find and can be even harder to assess while recruiting.
(01:45): Over the course of my nearly 20 years in private equity, I learned every lesson about hiring CFOs the hard way, and probably learned every lesson at least twice. At BluWave, interim CFOs and specialized CFO recruiter needs regularly top our PE firm request list league tables. So the top business builders in the world are also always looking for these unicorns. The genesis of my interest in CFOs started in my earlier days as a private equity investor. During the first phase of your career in PE, you often focus on understanding the elements of value that lead to a great company. As a PE professional grows and develops, it not only becomes about the what’s and why’s of companies, but also the who's.
(02:30): When I became a VP, I started being tasked with leading the recruitment and vetting processes for portfolio company CFOs that I was involved with. At first, candidly, I was terrified. What did I know about hiring a C-level executive? My experience thus far was in investment banking and private equity investment analysis. So the way I did it, when I was first asked to start doing it, was I would interview the entire market each time. After meeting every candidate possible, through brute-force pattern recognition, I'd eventually figure out who the best one was. Twelve weeks later, I'd usually find out it was the second person I interviewed, the recruiter would throw up their arms, and then they'd start again because the one I liked actually just took another job.
(03:16): Those experiences led me down a rabbit hole of reading, research, and questioning lots of experts about how to do the process the right way. It started with reading some of the seminal research from Hunter and Hunter and volumes of follow-up work by other researchers, talking with more senior-level partners who had figured it out over time, talking with recruiters and also CFOs themselves. Eventually I figured out an approach that worked for me, and I've been refining it ever since.
(03:48): Research shows that the best way to assess candidates is a multi-prong, structured approach. Interviews and references by themselves are not predictive of future performance. I'm sure we've all seen this in our career. The best methods use a combination of approaches, including a structured interview where you ask the same questions to each candidate, personality trait and cognitive aptitude assessments, case studies, and references. It needs to be a mosaic, not a single-arrow solution. All of your findings should then be captured in a common scorecard, and with each segment graded to give you relative readings across candidates. Too often, I'd hire the person I liked the most versus the best person for the job. I'm sure this resonates with a number of our listeners as well. The structured-scorecard approach is going to increase your objectivity, it's going to improve consistency, and it minimizes bias during the process.
(04:45): Today, we're going to talk about some of these how-to’s and lessons learned about how to hire a CFO the right way. The most important step, hands down, is preparation. As Ben Franklin wisely said, by failing to prepare, you're preparing to fail. So take meaningful time up front to outline exactly what you need in terms of skills, competencies, values, and other key attributes. Then build a scorecard that you can use to measure each candidate objectively against this criteria. A quick piece of advice: A great book you can read to get started and help you think about how to do a scorecard-based recruiting process the right way is a book called Who by Geoff Smart.
(05:30): Next, embrace the fact that unicorns are not easy to find. My recommendation is to hire a specialized recruiter who focuses on CFOs. One of the very top use cases that private equity firms use BluWave for is to connect them with the very best CFO recruiter for the unique and specific needs of each company. My recommendation is to do as private equity firms do. The right great recruiter is worth the money, and it's going to make a world of difference in terms of quickly bringing great talent to bear. As a side note, think about selecting your recruiter the same way you'd pick a CFO candidate. Use a scorecard to measure a recruiter against your key criteria for the specific job you're hiring.
(06:12): At BluWave, we use recruiters from our vetted ecosystem for every major hire we make. Time and time again it's paid off. As candidates starts coming in, with scorecard in hand, assign different parts of your scorecard to relevant key team members so you can systematically measure candidates against each of your criteria while getting a range of inputs from across your organization. Also, be prepared to move candidates through your process quickly. Top candidates don't last long on the market. This doesn't mean you compromise on candidate quality. It means you move them through your process quickly and efficiently. Think about putting together almost like a Lean Six Sigma process that's going to be very efficient, lead to little variation, and optimize quality.
(07:00): This brings us to the key elements that a PE-grade CFO scorecard should have. Whether you're with a PE-backed company or not, my recommendation is to recruit a CFO with private equity experience. The PE industry trains and develops the top CFOs in the world. Find someone who's already had the training. This is particularly true if you're within the PE ecosystem. PE moves at a unique pace and has particular requirements. If you're not in the PE ecosystem, you're still going to reap all sorts of benefits.
(07:29): Next, look for candidates that have similar-sized company experience. Different-sized companies have different levels of materiality, team structures, support infrastructure, politics, accounting systems, practices and procedures… An upper-market CFO will naturally have a harder time with an SMB-sized company and vice versa. One set of experience is not better than the other. They're just different. Vet your CFO with regard to not only where your company is, but where it's going. If you're a 100-million-dollar revenue company, you're going to be 200-million, look for a candidate that has gone through that range of sizes of businesses. I've had so many failures trying to bring in big-name, large-company CFOs who just couldn't function at a lower-middle-market-sized company. It wasn't that they weren't great. It was that they just weren't a good fit for a smaller-company environment.
(08:20): Next, look for candidates who are also aligned by your type of company. If your business is a manufacturer, best to find someone with manufacturing experience. If your company's a software business, it's a lot easier to understand software operating models when you've already worked for one. You don't want to be teaching your CFO what customer acquisition cost and lifetime value of customers are and why they're important and how to calculate them.
(08:46): Next up, find candidates who have relevant industry experience. Different industries have unique nuances. You want as similar industry experience as possible. This is particularly relevant for regulated industries or those with more unique accounting needs, like project-based accounting, subscription accounting, complex activity-based accounting, et cetera.
(09:08): Capital structure is another important consideration. Look for candidates with experience operating under similar capital structures to make interactions with lenders and investors more seamless. This is particularly true when you think about having debt in the balance sheet, entering a public company operating environment. You should also be thoughtful about aligning compensation. Be careful about candidates who previously made meaningfully more than your target level. They may say that they're okay with taking a step back in comp. In my experience, rarely will a candidate take a meaningful discount and not start looking for the best next role sooner than later. You don't want to be a bridge to somewhere else.
(09:47): In this day and age, I'd also recommend you spend time up front making sure the candidate will be available during your timeline and that they're okay with any geographic requirements. At BluWave, time and time again, we've seen projects get down to the finish line and at the end of the day, they say, "Well, I'm not really ready," or, "We're not going to move our family," which is totally understandable, but make sure you know these answers up front so you don't waste a lot of time and effort.
(10:13): Next, make sure you study and understand a candidate's track record. Be aware of those with multiple short, zero-to-two-year stints. Be aware of large gaps in employment. Look for track records of being recruited to bigger and better next roles versus leaving roles without a bird in hand, and then candidates then needing to find jobs in between. If there were bumps in the road, that's okay. Life's not a straight path to Rome. Inevitably there are going to be twists and turns during someone's career. However, look for candidates to own the results and ultimately share what they did to take action and improve the situation. Be aware of candidates who repeatedly blame circumstance and fate. Look for those who take fate head on and do whatever they can to overcome it.
(11:00): Your scorecard should also include measures to assess candidates' acumen with budgeting and forecasting, data analysis, communication, persuasion, judgment, alignment with your culture and values (very important), and fit for your top strategic initiatives in the days ahead. I also recommend that you have your candidate perform a case study to see how they would work through a real-life business challenge, opportunity, or workflow that's germane to your role. You should also study the way that candidates think and key personality traits. There are all sorts of companies that have tools that can help you understand a candidate's personality and cognitive aptitude.
(11:37): My advice is don't overly index on these, though. They're part of the mosaic, they're informative, but they're not the end-all, be-all when recruiting a top candidate. Use these tools to identify meaningful disconnects. With this in mind, don't overly weigh your assessment on any one criteria. The key is to understand the person as a whole. Use your scorecard and see which candidate overall fits your needs the best. When you use a structured, scorecard-based approach that includes a comprehensive assessment of a candidate's competencies, skills, values, intellect, personality, and real-life case study testing, I think you're going to find that your success rates are going to go way up. And this is not only just for CFOs; it's really for any hire.
(12:20): If all this seems daunting, it absolutely can be. The private equity industry understands this better than most. To help them improve the likeliness of their success, they regularly use BluWave to connect them with expert hiring-assessment specialists to help them make the best decision possible. You and anyone can use BluWave to connect with one of these PE-grade experts as well. But you can also do it yourself if you prepare up front and systematically assess candidates against what you know you need.
(12:50): As part of our Karma School of Business approach, we worked with a number of our PE heads of human capital friends to upgrade my back-in-the-day method and have encapsulated all of this, and really more, into a representative PE-grade CFO scorecard, along with questions that you can ask to help screen for each of these criteria. If you'd like a copy, we'd be happy to share it. Please email info@bluwave.net. B-L-U-W-A-V-E.net. Ask for the scorecard, and we'd be happy to provide you a gratis copy. If you have any suggestions to help improve the scorecard, please also let us know, as we try to make it continuously better and better over time.
(13:31): Well, that's a wrap for today. I hope you find this helpful. Thank you for joining us. For more information, go to bluwave.net/podcast. Please continue to look for us anywhere you find your favorite podcasts, including Apple, Google, and Spotify. We truly appreciate your support. If you like what you hear, please subscribe, review, and share. In the meantime, let us know if there's anything we can do to support your success. Onward.
THE BUSINESS BUILDER’S PODCAST
Private equity insights for and with top business builders, including investors, operators, executives and industry thought leaders. The Karma School of Business Podcast goes behind the scenes of PE, talking about business best practices and real-time industry trends. You'll learn from leading professionals and visionary business executives who will help you take action and enhance your life, whether you’re at a PE firm, a portco or a private or public company.
BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.
BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.
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