by: Steven Haug and Tony Topoleski
Today, we’re exploring the benefits of investing in a fractional CFO for your private equity firm. We’ll discuss the right time to bring this key resource into your business, what a fractional CFO can do for your company, and how much you can expect to pay daily for the services of a top financial strategist.
If you’ve listened to thought leadership podcasts, such as The GrowCFO Show, The ECA Podcast, or StrategicCFO360, you’ve probably noticed that the topic of fractional CFOs has come up over the years. An article published by Raconteur reported a 50% growth in fractional and interim roles between 2022 and 2023, with finance accounting for 30% of these appointments.
The growing demand for CFO services has caught the attention of finance professionals, too, and as a result, a good number have left full-time employment to work as fractional CFOs. This is fantastic news for private equity firms because it means the market has opened up for hiring a highly experienced and strategic Chief Financial Officer without a long-term commitment.
To start, let’s look at why a private equity firm should bring in a fractional Chief Financial Officer.
4 Valid reasons for hiring a fractional CFO
1. One resource pulling the financial strategy together
For a private equity firm, a CFO is a key management position that acts as a bridge between the PE firm and portfolio companies. Because PE firms are under pressure to achieve high returns over a set time horizon, having expert financial guidance is crucial to their success.
While the value of a full-time CFO for each portfolio company is undeniable (if you can find the right fit), the long-term commitment and associated costs outweigh the benefits within a finite window. Over a 5-7 year time horizon, these costs impact the overall return on investment, especially where the size of the operation does not justify full-time financial management.
PE firms will gain more from having someone help with financial strategies at critical times across portfolio companies. This will save money and provide the added value of one high-level executive who will bring all the companies in line with the PE firm’s desired goals.
Full-time vs. fractional CFO cost
So, what are we looking at here in terms of the numbers?
Salaries for CFOs vary depending on a number of factors, including geography, industry sponsorship and market size. According to ECA’s study of lower middle-market CFO salaries, the average base salary is $246,000 in PE-backed portfolio companies. This is of course in addition to other compensation components, including equity and bonuses, which come in at an average of 30% of the base salary.
Now, let’s compare this with fractional CFO costs. These costs can also depend on numerous factors including industry and skillset, but in our experience average daily rates for a middle-market fractional CFO range in the low to high $2000s.
Now that you have an idea of the savings you’ll get from using outsourced CFO services let’s continue looking at the reasons part-time strategic financial guidance will work for your PE firm.
2. Strategic guidance during the deal structuring phase
During leveraged buyouts (LBOs), the financial health of the company is a key focus. You need a financial expert to work on setting the right balance between debt and equity to minimize financing costs and enhance returns. This is especially true in complex financial landscapes.
When your firm uses leverage for finance acquisitions, the CFO is responsible for managing this debt, ensuring the company meets its debt covenants, and optimizing interest costs and engaging in cash flow management.
Also crucial in this early stage is forecasting and financial modeling, which is perhaps where the fractional CFO brings the most value. Even if you pay the average of $12,608 a month, the value you’ll get from these projections will outweigh the cost of using fractional CFO services.
3. Continued operational strategic planning
Once your PE firm acquires a new company, operational efficiency becomes a major focus. As we mentioned earlier, having a strategic partner on board who can pull all your financial objectives together across your portfolio is where a fractional CFO really becomes an asset.
Cost-cutting measures, supplier contracts, improved procurement processes, and optimizing cash flow using accurate financial data and metrics is a continued need for all PE firms. This requires the work of an executive with industry knowledge and a talent for forward thinking initiatives.
You might expect a CFO to work around 4 days at minimum a month at this stage. Using the averages we discussed above, the monthly cost would be $8,000 on the low end, and nearly $12,000 on the high end. Some fractional CFOs prefer to charge a fixed monthly fee at this stage, which will include a set number of hours or days of work.
This is still less than hiring a full-time CFO, and, of course, there is quite a bit of flexibility around the number of hours you want to use these services. But watch out for being too conservative; after all, if you’re going through growing pains, there will be considerable value coming out of the hours you’re paying for.
4. On-call project management
After the initial push, you may only require a fractional CFO’s experience on an ad hoc basis. Perhaps one of the portfolio companies needs to introduce a new product or service; maybe you need to manage some market fluctuations or require developing performance-based incentives.
As you prepare for an exit, the CFO ensures that the company’s financial statements, operations, and projections are in top shape to attract buyers. This involves robust financial reporting, clean audits, and a strong growth story.
The culture of work is evolving, and nothing stands in the way of a part-time executive adding just as much value as the pro who’s been there full-time, minus the full-time price tag.
Your costs as a PE firm for these services might reduce significantly once the dust settles. If the fractional CFO works for one day a week, that’s a monthly bill of between $8,000 – $9,000.
As you can see from our discussion, the costs associated with hiring a fractional CFO are significantly less than a full-time financial professional. Once you decide this is the best solution, what’s the next step?
Deciding that it’s a sustainable idea is only half the battle. You need the right person for the objectives you’re trying to achieve, a good culture fit, and someone with a proven track record. And if you’ve tried to manage a recruitment process, you’ll know that this can lead you down a long path littered with frustration. But it doesn’t have to be this way, and it shouldn’t be.
Have the right candidate in place within days
We’ve learned that selection and placement can take far too long when you need specialized skills right away. At ECA Partners, we use our vast network (more than 350K consultants) to find and secure top-level executives in the shortest amount of time.
With our seamless approach to selection (which includes data-driven analysis and our proprietary recruitment system which gives you full transparency during the entire process) we provide on-demand executives when you need them.
We’re a team of ex-consultants and Ph.Ds, committed to providing you with the right fractional CFO 2-3 times faster than our competitors. We’re also the only firm to volunteer to sign-up for and share KPIs regularly with our clients. Our evidence-based vetting process currently has a 95% retention rate.
Our clients include Caltius Captial Management, Vista Equity Partners, District Management Group, and many others. You can join our growing list by getting in touch with us about your next hire.
Frequently Asked Questions
1. In which industries does ECA Partners currently operate?
We have clients in the private equity space, healthcare, consulting, manufacturing, consumer and retail, and technology industries. We can provide you with on-demand consultants within 5 days, and interim execs within 1.5 weeks.
2. What percentage of repeat clients does ECA Partners have?
We have an 85% repeat client rating across service lines. With over a decade in the business, we believe this is a clear indication of the quality of our services and our effectiveness.
3. What is CASCADE?
The recruiting industry lacks transparency, so we built a proprietary talent management system to provide clients with real-time search data. At any point in the process, clients have a complete view of the pipeline, all the candidates being considered, and the underlying metrics to ensure an ideal outcome.
4. Why is the ECA Partners recruiting process different from others?
We’ve personally worked in the kinds of environments that our clients need to place executives. This gives us business and industry insight that other firms may lack. Each team member has spent time either in the consulting arena or private equity space or has spent a number of years in corporate structures.
We strongly believe in evidence-based vetting, driven by accurate and reliable data metrics that we’ve built up over time and tested over and over again to ensure consistency in results. Our founder and chairman, Atta Tarki, has expounded on our philosophy and on the principles of evidence-based selection in his book Evidence-Based Recruiting.
Steven Haug is a Managing Director at ECA Partners. He can be reached at [email protected]. Tony Topoleski is a Director at ECA Partners. He can be reached at [email protected].
