Private Equity's Co-Pilot: The Strategic Role of the CFO

[00:00:00] Lloyd Metz: Get ready to peer behind the curtain of the private equity universe with each episode of best, but never final. Hi, I'm Lloyd Metz joined by Doug McCormick and Sean Mooney. Together, we'll navigate the corridors of private equity, revealing the uncommon knowledge. Challenges, successes, and lessons that drive the world of private equity and business forward.

Let's go.

[00:00:35] Sean Mooney: Doug and Lloyd, it's great to be back with you guys here today. How are things going?

[00:00:39] Lloyd Metz: Hey, Sean. Hey, Doug.

[00:00:41] Doug McCormick: All good. All good. Thanks for asking.

[00:00:43] Sean Mooney: We have another, I dare say, amazing conversation in store today, probably going to be top 10. Well, it's going to be a top 10 topic in private equity. I'll leave it at that in terms of framing expectations.

[00:00:55] Doug McCormick: Hey, Sean, that's a solid one, given that we've done six of these.

[00:00:58] Sean Mooney: I know, that's exactly right. I know how to frame these things. I'm a math person. So what we're going to talk about, I do think, is one of the, you know, one of the pillars of, you know, Conversations and topics, and this is the whole idea and the whole concept of the role of a quote unquote strategic CFO in private equity, what this role is and why it matters.

Does that sound like a good topic for the day?

[00:01:24] Lloyd Metz: Oh boy. We can talk a long time on this one.

[00:01:27] Sean Mooney: This could be seven episodes if we're not careful. For our listeners, we'll try to keep this relatively succinct. So maybe to kick this off, we'll start at the basics. What are the roles that CFOs play in private equity and why does it matter so much?

And so maybe Lloyd, I'll throw you the baton right out of the gates here.

[00:01:45] Lloyd Metz: A CFO in our view, and I'd be curious to hear what you think Doug and Sean, but I think They are a partner to the CEO. So they need to be a strategic participant in the business, a strategic thinker in the business and not limit themselves to just the financials and the financial reporting.

The example I like to use and it's kind of dated, but I think it applies is if you remember the old movie Top Gun, the first one, not the more recent one, which was also really good. But the first one, right? It You had the pilot and then you had the guy in the backseat, right? Backseat person is the weapon systems officer, but they're also the co pilot, right?

So their job is to be as situationally aware as the pilot and they call the fight, right? They're spotting targets, assessing threats, and literally giving directive instructions to the pilot. Where to go, where to turn, how to turn to make sure they're on target and out of threat. I think it applies to a CFO in a private equity situation.

That's your job is to keep that CEO situationally aware, aware of threats, focused on targets so that you guys can do the best job that you can with the business. That's an analogy I think holds.

[00:03:09] Sean Mooney: I really like that analogy. A, it's a great movie, you know, Talk to Me, Goose. There's all sorts of things that resonate with me.

The second one, I agree, was also pretty good. And the one thing I personally don't have any issues with it, but I'm curious if Doug does because as we know, Doug's an army guy and you gave a Navy reference. So Doug, what's your thoughts on that?

[00:03:29] Doug McCormick: Yeah, well, listen, the CFO position is a badass position, right?

So I do think a Navy analogy is kind of inappropriate. I think this should be an Apache helicopter and then you're set.

[00:03:40] Sean Mooney: Okay. I like that. We can go with that too.

[00:03:43] Doug McCormick: Yeah, yeah, yeah. We'll make the analogies to suit our own agenda.

[00:03:46] Lloyd Metz: Doug, I think you're going to get a little heat.

[00:03:47] Doug McCormick: Okay, and for the record, I cheer for Navy at every football game except Army Navy.

I'm a huge Navy fan. There's just a relative pecking order there. I agree with Lloyd. I think the CFO is the co pilot. In often cases, he's a thought partner for the CEO. I would say though, before you can be a strategic CFO, you have to be a competent CFO. And so I think a lot of the skills, especially in the businesses that we get involved with, in many cases, we don't have a CFO, we don't have a particularly mature financial function.

And so I think the CFOs that we end up engaging with actually have a fair amount of work to do to build the team and the infrastructure to do what I think is foundational work, you know, financial forecast, not only income statement, but cash flow and liquidity. It's a pretty broad role. They're often involved in financing relationships, M& A activities, convening outside perspectives from other experts on the team.

So it really is a multi hat kind of position.

[00:04:47] Sean Mooney: I think that's spot on Doug as well. And as I look, not only think back in prior kind of experiences, but also what we see here where, you know, the number one call we get is for CFO and private equity and your point regarding kind of like, it's a journey, you got to be a competent CFO before you can be a strategic CFO is really good in that very often, particularly in lower middle market companies, what we see is they have kind of maybe a controller.

And what that means is the person can. Accurately close the books relatively on time and then the journey that we see and we'll talk more about this as we go in is it's can they tell you then not only what happened, but what it meant, what it means. And you look at those numbers and then not only what it means, but why did that happen?

And then to your point, Doug, can they then forecast what's going to happen and then do they know why that's going to happen? And then the ultimate, I think when you get to a strategic CFO is. Can you bend space and time and say, here's what will happen because we want it to happen. And here's what we need to do to get there.

Is that a good description of the journey?

[00:05:57] Lloyd Metz: Absolutely. Sean, right? Like when you get to that highest level of strategic CFO, you help your CEO and the organization see around corners.

[00:06:05] Doug McCormick: I think it's, very simplistically the difference between playing defense and offense, right? Like, how do I aggregate information versus how do I use that information to drive insights that affect behavior.

And, you know, I think there's often a question of, well, we've done fine before. Why is this so important today versus the last several decades, which have been very successful? And I think it all gets back to the rate of investment and these skillsets become increasingly important when you're making capital allocation decisions, right?

So in the context of M& A, the context of investing in organic growth. The visibility of what's the impact of that, how do we track it, how do we decide if it's working or not becomes increasingly important.

[00:06:44] Sean Mooney: What's fascinating about the role and one I personally think it's probably the hardest job in the entire private equity portfolio company ecosystem, because you got to be an introvert and analytical, you have to be extroverted, you have to be able to gather information, you have to be able to analyze information, you have to be able to disseminate it.

And not only is that a journey that you have to go on just to get to the starting point, but your job changes as the company moves faster and gets bigger. And so that evolution for a 50 million company, your zone of responsibilities is different than when it's a hundred, then it's different when it's a billion.

And very few can make that jump through the entire continuum. And so what that means very often, at least from what we see in the vantage, when every day we get a call, like we need to recruit a CFO is that. It's really hard to do that. Some can make it, but very often what we see is there are different people who are more suited for different sizes, stages, and paces of companies over time.

Are you all seeing any of that in the same ways from the companies as you kind of build them through their journeys?

[00:07:47] Lloyd Metz: I definitely see that happen where the CFOs kind of stall out in their evolution. I don't know if it's because they don't feel like they need to evolve and evolve and grow as laid out in the continuum.

But maybe because they think their job is purely financial and accounting, and then maybe you get another one who thinks you can do a little bit more. I don't know. I would like to think people, if they knew that their job was to evolve and grow and to become a bigger, broader, More thoughtful, strategic business person, and not just a CFO tied to accounting.

Maybe they would evolve. Maybe more of them would evolve and you'd have less requests for a new CFO. But we see CFOs wind up stalling out and then the business needs outgrow them, and then you have to replace. I don't think it necessarily has to be that way.

[00:08:40] Doug McCormick: Yeah, Sean, I would say, and this is not a HCI comment, this is an industry comment, it's probably one of the highest turnover positions in a senior leadership team in a private equity backed company.

And I think to your point, maybe that's a product of many hats that this person wears and having to be good and a whole lot of different things. I also think it's a byproduct of this function, maybe one of the biggest, uh, that changes in terms of fundamental capabilities, right? So if you think about like sales capabilities, in many cases you do more sales, you create more capacity, but oftentimes in the CFO role, you're actually creating, a different set of skill sets and a different set of capabilities.

And the other thing I'd say that I think it's an interesting kind of tangent on this discussion, the impact the CFO has, I believe, is directly correlated to the quality and maturity of the team. If your team's not ready and capable of hearing the message, then the impact is lost, right? And so I often find in many cases, the CFO's impact grows over time, not simply because the organization's getting better, but the team around them is getting better and can use that information, draw insights that are valuable to the company based on their improving capacity as well.

[00:09:54] Sean Mooney: My perspective on cFOs has changed a little bit over time, particularly here at BluWave, because we've built this ecosystem of interim CFOs. It's like 750 of them and it's purposely spans From lower middle market to public company readiness. And as I've looked at this kind of scatterplot of capabilities and skills, I think there's some that can make this progression and be kind of like, if you think the tech example would be like the full stack coder, you know, versus the full stack CFO.

And what I've seen is like, that public company CFO, what's needed for them to be successful is different. They need to be A manager of a large organization, they have to be forward speaking on earnings calls every quarter. They have to manage big bureaucracies of some ways. They need to know the compliance is much bigger part of their job.

And then if you take that all the way down to the lower middle market, they're getting much more of a player coach. if they can only wax poetic in front of a whiteboard, it's going to be really hard for them. And so in some ways, like at least I'll say, I've made this mistake where you bring a big company person down to a smaller company.

And it's really hard for them to be successful and it's hard in the flip side to do it other way. So I've kind of evolved this philosophy. It's like, there's kind of like different people that are better for different sizes and stages. I don't know what you all think.

[00:11:08] Lloyd Metz: Yeah. I would say definitely don't bring a big company CFO down to the lower middle market.

Don't do that. Definitely don't do that.

[00:11:16] Doug McCormick: Yeah. Sean, I'm reflecting on another aspect of what you said, which is just the whole concept of an interim. I think it's one of the few positions where I think interim can really provide value. I hate the concept of interim in general, because it feels like, even if you have a great athlete, the ramp up time and the ramp down time and the chaos that results from transition, I think is something that is meaningful.

But because the CFO skill set is almost, to some extent, business agnostic. I think this is a role that you can have an interim create, temporary skill sets to bridge you to a different kind of steady state.

[00:11:51] Sean Mooney: A hundred percent. And that's why we, it's one of the top requests we get is because A, to find that next day player, it takes six months.

And it's like, you don't want the first next, you want the best next. And then B, what's interesting is just a quick aside. What we've seen is. And this will be made part of the conversation is to be a successful private equity backed CFO. The reality is you have to have been previously backed by private equity.

So there's this chicken and egg issue. And then you have to have almost like this unmitigated, unending chain of success. And so what we've seen even is on the CFO saying, you know what, I might want to go on a few dates first as well. Because the private equity firms are always like, yeah, let's check each other out.

And it used to be the CFO was like, no way. Now they're like, you know, how about we both go on a few days before we go steady with each other? Does that resonate with either of y'all?

[00:12:40] Lloyd Metz: Are you workshopping like Bumble for CFOs?

[00:12:44] Sean Mooney: There might be some trade naming that we're reserving rights to right now.

[00:12:49] Doug McCormick: It is the one position that literally changes overnight, right?

So family founder, own business, you may, close your books every quarter. You may really focus on, Hey, how'd I do at the end of the year? And we think about tax distributions and other things. And so, end up doing a transaction and day one, you know, the private equity owner is going to expect you to close within 30 days, if not sooner, you've got a pretty detailed forecast.

And also, by the way, you got this thing called covenants. So I do think it's like the light switch goes on. And acknowledging that you have a step function change in the amount of work and capacity for that role can make a lot of sense in the context of the interim.

[00:13:28] Sean Mooney: This episode is brought to you today by HCI Equity Partners, a lower middle market private equity firm focused on partnering with family and founder owned manufacturing service and distribution companies.

ICV Partners. An innovative private equity firm supporting management teams of leading companies at the lower end of the middle market and BluWave, the Business Builders Network connecting the most proactive business builders in the world with the best of the best service providers for critical variable, on point and on time due diligence and value creation needs.

Now back to the episode. Let's maybe take it a step further. So we've talked about why the role matters in private equity, why it's such an important role, why it can be so challenging. I'd like to get your thoughts on how do private equity firms go about selecting a CFO for their portfolio companies. So Doug, can you talk a little bit about that?

[00:14:24] Doug McCormick: Yeah, I'd start because I think it has implications for the how is when, and to your point, this is a position that often doesn't reside in the business or owner and seller have concluded that the skill set is so different from what they had before that it's a position that it often happens up front.

You know, candidly, we don't look at it this way, but I know a number of private equity firms actually say, as a matter of practice, we're going to change the financial leadership, day one, because we just want a clean start, integrity of financials, and they have concerns around like the legacy.

So I would say, this is a position that often is filled very close to the front of a whole position. In terms of like what we look for, I mean, I think of any position within the organization, intellectual horsepower matters a lot here. Like, so that there's an aptitude component of being a really good CFO.

Like you're just facile with numbers, you know, and you're intuitive around financial analytics and it just comes naturally, I think makes for a really good skill set. We do third party kind of testing on CFOs and we find them consistently score really high on it. Numeric capacity, quality of thought process, those kind of things.

The other two things I would say are kind of experience related. We call it an academy experience where they've worked in a big corporate and they're not maybe managing a big corporate function, but they understand like the cadence and the discipline and what a good mature financial process looks like that they can replicate.

And then I do think being in a private equity environment before is a great indicator of future success for a couple of reasons. One, you've kind of cut your teeth on a challenging experience before. It's a great reference set and you kind of know what you're getting into both parties. And so I think that's something that people look for frequently.

The last thing I'd say is I think there's a lot of interpersonal skills component of the CFO role that makes someone successful. Because financial analytics have implications for every aspect of the business, being a convener, being someone who can solicit input from other subject matter experts, I think is really critical.

So this is not like a really smart guy off in the corner who, is doing their own thing. business leader with a financial depth that is trying to go across all of the business to find opportunity.

[00:16:48] Sean Mooney: I've really liked all your points, but the last one is one I think that's lost on a lot of people.

They think about the CFO as the analytical, introvert, prototypical accountant out of central casting, but the reality is they need to be someone who can seamlessly interact with people. Pretty much the entirety of the organization and not only gathering information, but disseminating it.

[00:17:12] Lloyd Metz: Yeah, I agree with that a hundred percent.

And I like the way you put it, Doug, because in my experience, the best strategic CFOs take complete authority and exercise authority over everything in the business that's expressed numerically. So they will go wander and talk to the salespeople, right? And you can talk about sales metrics. And you can go talk to HR and talk about hiring metrics and effectiveness and ratings of whatever people are doing in HR.

They have that fundamental business curiosity in addition to that horsepower. And the very best strategic CFOs, I believe, are translators. So they can translate what folks are saying in sales or what people are doing in HR. Connect the dots and translate it into financial impact. And by doing so, they can help the CEO allocate resources, better make better decisions, have the team make better decisions, right?

But you need to have that business curiosity and the people skills like you described, Doug, because you have to be able to go talk to people or say, Hey, you know, Doug, maybe you should hire three more people or whatever it is, because if they're producing like these other people are producing, then you'll beat your goal or you'll grow it by 50 percent or whatever it is, they can translate that kind of business decision into real outcome impact.

[00:18:35] Doug McCormick: I like the way you talk about as a translator. If you say that financial reporting is the language of business, in many cases, the CFO's job is to make that language.

Understandable and translatable to every component of the business, right? The sales team, the ops team, et cetera. So that makes a lot of sense to me. And by the way, then you got the private equity speak, right? And so in many cases, these guys are gonna be translators with the ownership group.

[00:18:59] Lloyd Metz: And when you think about the business challenges and growth objectives and the different people in the organization, and this is still at the lower middle market, you also have to be able to translate and interpret intention, right?

If Doug, you're head in sales and you wanna. You know, and I know your target to grow sales is 20 percent growth this year, and you're debating with the CEO on how to get something done. A good CFO can hear that debate and find a way to support your intention, your objectives, right? I think Sean, you had said in a different episode, maybe, you know, finding a way to yes, right?

How do you help that head of sales or whatever, achieve their objectives?

[00:19:41] Sean Mooney: And it's a really good point in terms of like the attribute of a CFO. I think many people, when they first get into the industry, they think their job is to say no, their job is to lock things down. And Lloyd, to your point, what I eventually learned through so many laps in private equity was that their job is really the way, how do you find a way to say yes in a risk mitigated thoughtful way where you understand the variety of outcomes before you get into it.

[00:20:10] Lloyd Metz: Okay. The only thing I would add to what you said, Sean, is you also have to have enough judgment to know when to shift gears, because there is an element of the job where it is to, like, lock down costs and find ways to get people to find a way to do something faster, more efficiently, less expensively.

But that's not the mode you're in all the time. You kind of have to know when to open up the playbook and say, you know what, we should invest money, or maybe we should spend more or hire more. You need to have some judgment.

[00:20:42] Sean Mooney: I want to talk about in a moment, what are those attributes that make this financial leader a successful PE portfolio company CFO.

But maybe before we go there, I'd be curious just that maybe just some of the basics of your process. Do you all hire recruiters? Do you have kind of a structured process that you do. What is the way that you go about quote unquote, finding this person for your portfolio companies to play this really crucial role?

[00:21:08] Lloyd Metz: We use third party recruiters generally word of mouth also is helpful. But the first thing we do is lay out a structured, we call it a scorecard of what we want this person to do in the position. That's usually five or six. Broad objectives, and each one has several sub objectives, which address specifically what and how.

And so being a good partner to the CEO is usually one or two on the scorecard. And we get into more specificity about it because based on the CEO that you have, you have a sense for what is complementary or what set of behaviors or characteristics or skills are complementary to that CEO. And so you bake those into the scorecard and then we proceed from there.

Being able to manage and communicate with the board effectively, being able to manage and communicate with your lenders effectively. If you need them to speed up the closing of books, if you need them to reduce working capital or if you need them to increase cashflow, whatever it is you want that position to do, you spell it out.

And you usually do that with the CEO and other senior leaders as well as us at the private equity firm. Before you see any candidates. That way we can all get alignment on what we're looking for. And that scorecard actually drives. Interview questions and review and discussion of candidates that you do meet.

So that's how we approach it.

[00:22:38] Doug McCormick: Here's a straw man of a process. I mean, I think everybody's got their own, but a couple of key elements. First of all, we tended to use third party recruiters as well. we're in the market frequently in many different industries. And so that to us is kind of the highest probability placement, right.

Is getting some help. Like Lloyd, we spend a fair amount of time up front kind of getting aligned on a job spec that's facilitated by whoever we end up using from a recruiter perspective. And I think that's valuable not only in terms of, Hey, what I want, but it forces a valuable conversation amongst the private equity team and the recruiter and the company management team around what is the market profile for somebody like that?

And then what is the comp and kind of making sure that those all fit together and we're being realistic. And in many cases, Guys like me and Lloyd are not realistic, right? We want ridiculous skill sets and we want it at market, right? So that's an important part of the process. Our team to evaluate these individuals always includes the CEO.

It includes the deal team. It also includes the ops team. So we've got all the constituents in that interview process. We'll put people through a series of interviews. And that's usually staged, right? So like we'll have a deal team member and an ops team member interview the person. If they screened them and liked them, then they'll pass them along to the CEO.

And maybe somebody like me, we do often do third party testing to kind of put their experience into context. And it's really not like a pass fail. It's more about here are these person's biases. Here's their aptitudes. Here's their weaknesses. How does that fit into the job spec that you've classified or you've characterized?

We look at it as an indicator of fit more than like a, Hey, this is a good test score and a bad test score. And then, we find that the last step that is sometimes in person that doesn't have to be, but it's what we kind of think more of as a group discussion, almost organized like a case study.

And so, we'll have five folks on the deal team, the CEO, and we'll have the candidate. Okay. And we've given that candidate some information ahead of time, and that way you can talk about the business with some information and see how they think, see, how they interact with us to solve problems.

So I think that's a really helpful and interesting way to kind of like really get at what will this person do and will they be a fit with the team. And the last thing I'd say is, I just rifled off like 10 different things we do. But you got to do this quickly, right? Because the market is very dynamic.

A good CFO is going to be in and out of market pretty quickly. And so you've got to make the process fit the market and get to yes or no, fill or kill pretty quickly.

[00:25:17] Sean Mooney: I think what both of you, Doug and Lloyd have said is. A thousand percent right, and a thousand percent what the best research will show that you should do, and that's why you guys have been so successful, because we're and you're in a people business, and so for those who are thinking about how do you do this yourself, the only guidance I might give, because I went through the same journey, I remember, as a vice president of private equity, They're like, all right, kid, now you're interviewing CFOs.

And I'm like, what? Panic attack. Like, what do I know? And I'd interviewed the entire market. And then three months later, I realized it was the second person I met. So I didn't learn that until way, way late. And so I started like delving into tons and tons of research. And so there's a duo called Hunter and Schmidt.

If you research and look into them, they've done a lot of this foundational research describing exactly what you've described, which is called the structured interviewing process. So those are listeners who really want to get smart on kind of this process that Doug and Lloyd have described. Look up Hunter and Schmidt, and I'd say read this book that kind of builds on that called Who by Jeff Smart.

That's another really good way, like, how you can do this yourself to be better at the process and get a higher likelihood of success through this really challenging, navigation through the complexity of humanity.

[00:26:33] Doug McCormick: Hey, Sean, just if I could add one thing to your comment, what strikes me about this part of the job is, first of all, it is an underappreciated core competency, right, and it's one of those things where it's going to take the same amount of time, whether I do a crappy job or a great job, I always feel like, man, I got to be on my game, I got to be totally intentive in those things, because if I pick the right person versus the wrong, I got to redo when we pick the wrong, so I got to start over.

The second is like the trajectory of the business can be so impacted. It's just a high impact area for engagement.

[00:27:06] Lloyd Metz: That's absolutely right. And, I think, Doug, you mentioned comp at one point. The way we like to think about it, the CFO, especially if you get it right, usually has the second highest equity ownership after the CEO and the organization and the team, and often are the second highest compensated cash comp on the leadership team.

Sometimes it's maybe a tie with. Whatever the head commercial officer, the head sales person or what have you, but they're pretty highly compensated and rewarded because of exactly what Doug said.

[00:27:39] Sean Mooney: I think that's another great point. And the one other thing I'll call out that I really liked what you said is when you're doing this, you're looking for A's and the A's don't always just show up your door.

So use a really good recruiter number one or number two, every quarter, the top reason P firms call us is for a specialized recruiter. And my advice on your recruiter is use a scorecard on them as well. Pick your recruiter based upon the same things that you're doing and really any service providers what we've learned.

But it's like, particularly for that, get that same specificity and your odds of success are going to go much, much, much higher.

[00:28:14] Doug McCormick: You know, the old saying, Sean, like, half of the decision is made by the choices that you're given. Right. So if you feel like the recruiter's core competency is to deliver exceptional candidates, I mean, that has a big impact on where you end up.

Right.

[00:28:26] Sean Mooney: Amen. Let's turn the page. So you've gotten your CFO on board. You've done all this great work. You've been very thoughtful and purposeful about bringing them in. Now, how can a financial leader be successful as a private equity portfolio company CFO once they're in the seat? It's a Lloyd. There's a hot bun.

We'll start with you. We'll throw you that hot potato.

[00:28:50] Lloyd Metz: Well, I guess first understand who your loyalty and duty lies with. And honestly, I'm surprised at how many CFOs are confused about this. Your duty is with the company. It lies with the enterprise. And so you are absolutely a partner to the CEO, just like I described, you're the backseat co pilot to the CEO, but your loyalty is with the enterprise and all its shareholders.

So that includes the private equity folks. And that includes all the other members of the leadership team who own equity, et cetera. And so you are expected to be vocal. And involved in the decision making and anything that is threatening or jeopardizing the enterprise, you need to speak up, you need to be involved in the problem solving, you need to be involved in anticipating these issues that may arise.

And on the other side, opportunities, right? If you see there are opportunities, analyze them, quantify them, sell them internally, make sure the board's aware of them. That's how you stand out. That's how you're successful at a high, high level. And it's not always clear to me that CFOs understand that.

[00:30:07] Sean Mooney: How about you Doug?

[00:30:08] Doug McCormick: Lloyd and I are saying the same things, we're probably come at it a little bit differently, but to me, number one is integrity. In every senior leadership position, that's an element, but I think this one can be tested frequently. And so integrity is really around the comfort and ability of communicating quickly, good news and bad news.

You always want to be able to rely on your CFO to be your eyes on person that is giving you, what's happening on the battlefield, if you will. I think communication broadly is a really important skill set that differentiates great CFOs. And it's this concept that Lloyd kind of mentioned of, Being intellectually honest and being able to challenge the private equity firm when you think that they've got a misperception about what's going on or what's the right course of action, as well as your own teammates.

So you kind of get to be the arbiter, if you will. And then, this proactive communication. And that's not just like good news and bad news, but that is what is happening in the business. How can I feed my leaders with intelligence, if you will, that allows them to kind of course correct quickly.

And then I think there's a managerial element to it. What I think the managerial element does is it allows the CFO to deliver predictable, quick, consistent financial reporting in a way that everybody kind of knows, like what is as is before you decide where you're headed in the future. Last thing for me is I think this is a position where you can really influence the team thinking with unique insights.

And so the CFOs that spend the time to really. Look at the financials and ask the fundamental questions around, like, where are we making our money? Where was the variance in the budget? And what does that imply in terms of how to change behavior for guys like me and Lloyd, there's so much valuable information in the financials that someone can, they can really translate those into actions is really valuable

[00:31:57] Sean Mooney: For our listeners who are either current CFOs in the PE world or aspiring.

This is kind of the masterclass here, right? That you guys just described. And I really liked that. One, this whole concept of fiduciary duty to the enterprise, not agenda, and being a source of truth within the organization. And then Doug, also your point on this whole concept of integrity. If you are a CFO, the odds are during some point in your career, you are going to be either tempted or pressured to say, let's release the reserves.

Let's do something that maybe pushes the boundaries. And I can tell you 10 out of 10 times, the right answer is don't do it because inevitably it will catch up. And so that source of integrity, I think is critically important as a lesson for anyone either in the seat or aspiring the seat. And that should always be their true north because it'll catch up.

It doesn't matter. maybe you get away with it once, but eventually it'll do it. And not only does it have integrity implications, but also legal implications. And so. Think with your true heart, but also your head on that concept. And I really liked the other points you mentioned about like, also touching on some of the earlier points is like build your foundation from the basics.

First, get your numbers, right? Make sure they're right and make sure they're on time. And then, to what you're talking about earlier, like know what they mean. Like, don't ever go to your CEO and not know why something happened, and just say, here's your numbers. If you're, if you're just throwing numbers in front of them, you don't know why, and you don't know them.

They're not in your head. That probably shows me you don't know the business and your job is to know the inner workings of business and what are the fewer measures that matter. And if you don't know those, your career is probably going to be pretty short in private equity. And then, you know, if you go to the Maslow's hierarchy of needs, that self, activation and realization, then you can start working on like what will happen and why will happen and being the navigator.

[00:33:52] Lloyd Metz: That's right.

[00:33:53] Doug McCormick: think a common theme I see is the best CFOs. I've done a good job of making themselves appear to be a resource for the leaders within the organization, right? So the CEO says, Oh, man, my CFO does these things for me. The head of sales, same head of ops. So, you know, in each case, the CFO is bringing insights to those leaders that help them, stand out or differentiate themselves in the organization based on whatever he's provided.

[00:34:19] Lloyd Metz: 100 percent right there's no reason a CFO can't go talk to the head of sales or the chief commercial officer and say, you know, from the board conversation and their private equity folks, Doug and Lloyd were talking about pricing. Well, I was playing around with some of your numbers and if you increase price on these.

Products or these SKUs by X amount, you'll increase your sales by this amount and your profits by this amount. And the head of sales can, get alignment with you on that. Can get excited behind it. And you've helped them go hit their numbers and look like a star in front of the CEO and the board.

Right. There's no reason a CFO can't do that. Same thing with your chief operating officer, right. And helping them. Realize efficiencies or cost savings or what have you. Inter personal skills are pretty important. And being a partner to the rest of the leaders of the firm is a huge opportunity. I don't think enough CFOs take advantage of that opportunity.

[00:35:13] Sean Mooney: Those are phenomenal points. It's just, you know, get some assists, go out there. Don't just ingest information and publish it actively disseminated and help the others, put points on the board.

[00:35:23] Lloyd Metz: Exactly.

[00:35:24] Sean Mooney: So maybe to wrap things up here, this is in some ways the most nuanced topic of our conversation here.

And that's kind of the reporting structure of a CFO, specifically within private equity. And so, all CFOs, pretty much all, I don't know many that don't, have a direct reporting line to the CEO. But they often also have what's called a dotted line to the private equity firm. So i'd be curious Doug and lloyd, why is this why is this helpful?

And maybe what are some of the pitfalls associated with that?

[00:35:54] Lloyd Metz: Well, doug alluded to it earlier, right where you said a lot of private equity firms will swap out the cfo Just because right and i'll try to put words in your mouth and you can spit them out if they don't taste good But my sense is that you do that because you want the cfo to know who their real boss is You

[00:36:12] Doug McCormick: Yeah.

So I actually, I'll spit those out a little bit. I think it's one of those things where I want to have the kind of trust with my CEO and the CFO that they don't feel threatened by me talking to either one of them. And in many cases, I believe the private equity deal team is probably some of the most sophisticated folks on the collective broader team.

And we may want to spend time on financial information and we may have needs for whether we're doing a financing or thinking about M& A. And I don't want to bother the CEO, right? Cause it's not really important relative to his work streams. And so I think it's more like a collaborative team where you got three different skillsets, CEO, CFO, and PE team, all kind of trying to get to the same longterm goal, but have different supporting roles.

So to me, that's the biggest reason to have that dotted responsibility. And can't really like. Just the level of interaction with different deal team members. Right? So I'm probably not talking to the CFO that much. I'm talking more to the CEO, but the rest of my deal team, probably talking a lot more to the CFO.

[00:37:16] Sean Mooney: That's another great point. There's going to be different people within the PE firms who are also going to have greater touch points with different organizations. So people on your ops team might be talking more with your operational professionals, your VPs and principals are probably talking more with the CFO, you're talking more with the CEO, and it goes to this whole kind of symphonic partnership that we've talked about through all these episodes.

[00:37:37] Lloyd Metz: So the CFO is first violinist is what you're saying, Sean, right?

[00:37:41] Sean Mooney: Yes. I'm going to act like I know what you said with expertise. And so I'm going to say, yes.

[00:37:48] Doug McCormick: Yeah, Lloyd, I'm just kind of just reflecting on how to think about this part of the exchange. I do think there's a distinction between a straight line and a dotted line in the context of, even though we have a lot of interaction with the CFO, I think that asset first and foremost reports to the CEO and has a mandate that he's accountable to, to support the CEO.

But then we have access to. Again, what we need, but also direct communication to make sure we're all dealing with the most current info.

[00:38:17] Lloyd Metz: And in all seriousness, I do like your characterization and actually I do think that's the right answer because a lot of the interaction with the private equity firm is to and through the CFO.

And to the extent that the fundamental underpinnings of that dotted line and that daily interaction Is we expect and trust that what you're telling us, Mr or Ms CFO is an accurate reflection of what's taking place in the business that we have invested in that we have acquired and you're giving us an accurate and true depiction of what's happening.

Now if that ever gets called into question, that becomes a big problem.

[00:38:54] Sean Mooney: And I think that's a good point as I think about it, so often what good companies do is you have checks and balances, not because you expect them to occur, but But because there's a small percentage chance that you could have a very large, bad outcome.

Same reason why you buy insurance. You don't expect this to happen. But that dotted line is a check to saying, you know what, there might be, this very small percentage chance that someone falls victim to temptation by establishing that dotted line. It's just a small measure of saying, you know what, don't listen to that, very small voice in your head that may or may not be there because we have systems in place to protect against it.

It's the same way within the accounting systems, they have rules, right? You've got to have checks and balances, even within the finance department, because there's hugely bad things that can happen if something goes amok.

[00:39:41] Lloyd Metz: That's right. It's a good way of putting it. Checks and balances.

[00:39:45] Sean Mooney: All right.

So I think we have talked about a lot of things that are really central to the success of the company. And that's the office of the CFO. And private equity, anything else that we should touch base on before we say adieu?

[00:39:59] Lloyd Metz: Again for all the CFOs who may or may not be listening out there to our podcast, it is a position that is hard as we've described, but it has a lot of opportunity and you have many occasions to differentiate yourself, add value for the company and the private equity sponsor if you seize on those opportunities.

[00:40:20] Sean Mooney: I think well said by Lloyd. It's a hard job, but it's one of the most fascinating ones you could ever hope for in a career. So I think we got a lot done today. Gentlemen

[00:40:28] Doug McCormick: enjoyed it. Thank you. A special thanks to HCI equity partners, a lower middle market, private equity firm focused on driving transformational growth through consolidation strategies by partnering with family and founder own manufacturing.

Services and distribution companies. Learn more at hciequity. com. ICV Partners, an innovative lower middle market private equity firm, supporting management teams of leading companies at the lower end of the middle market. Learn more about ICV at icvpartners. com. And finally, BluWave. The Business Builders Network connecting the most proactive business builders in the world with the best of the best service providers for critical, variable, on point, and on time due diligence and value creation needs.

Learn more about BluWave at BluWave. net. For further information on HCI, ICV, and BluWave, And relevant topics discussed here in the episode, please see the episode notes for links.

[00:41:31] Sean Mooney: The views and opinions expressed in this program are those of the individuals presenting, and do not necessarily reflect the views or positions of any other persons or entities, including those referenced herein.