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One of the most regular topics for debate with management teams looking for funding is the need for a good Finance Director (“FD”) / Chief Financial Officer (“CFO”) as quite often companies seeking growth capital may have never had a permanent hire in this role, relying more on bookkeeping resource and the commercial expertise of the founders. We believe that as well as being essential to the day to day running of a business, a good CFO adds material value at every stage – when we’re investing, through the value creation phase and in the run-up to and then transacting of an exit. There are multiple reasons for this, here we pick out a few:
Private equity investing, in YFM’s case either from our Venture Capital Trusts (“VCTs”) or Investment funds (“Funds”) is rewarding in many ways – we get to back brilliant individuals with a passion for growing their business, in an interesting range of sectors, supporting UK job and wealth creation. For a founder seeking growth capital or a team looking to do an MBO, it is more than this – I’d imagine exciting, unsettling, distracting, life-changing would be nearer the mark!
At this stage a CFO has a really important role to play. Quality management information, cash flow forecasts and longer-term projections build credibility – allowing for a quicker completion, less distraction for management and greater confidence for investors.
It’s key to hit the ground running after completion – funds have been invested to back a plan to scale the business and the capital structure will have changed (possibly seeing the introduction of bank and / or shareholder loans). There is a lot to deal with but the CFO increases management’s bandwidth – picking up the salient points out of the DD process, setting KPIs to track performance and give the company’s board the data needed to evolve plans, while continuing to manage external stakeholders.
Our portfolio companies target growth in different ways – for some it’s by scaling up their sales & marketing function, for others it’s by opening an office overseas or buying another business. In each case the business will look fundamentally different to before the transaction and management of that change and all that goes with it (e.g. incentive plans / local regulations / M&A process amongst many, many others) needs the CFO there to drive that forward.
We work hard at alignment – thinking we can deliver the best results for our investors if we partner with management teams in a way that means we’re all pointing in the same direction. We talk about exit on a regular basis almost as soon as we’ve invested – not because we’re keen to get there quicker, but because we think the “long-term lens” is helpful for appraising all material decisions, be they short-term tactical ones or longer-term strategic initiatives. A CFO plays a critical role in exit readiness – from reporting to regulating, compliance to customer contracts – making sure the business will stand up to a purchaser’s diligence, thereby maximising value realisation through an exit event.
YFM has a varied portfolio of companies at different stages of maturity and on different growth trajectories – that’s one of the great things about investing in the UK lower mid-market. We’ve found that one of the common themes among our successes has been the breadth and depth a good CFO brings to the table.
