Navigating Transition with Interim Financial Leadership

January 2022

BY

Patrick FodaleManaging Director, Business Restructuring & Turnaround Services, BDO Consulting Group, LLC

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From the challenges created by the COVID-19 pandemic to the current landscape of a red-hot M&A market, we are seeing many situations that place new demands on the finance function within a diverse range of companies, from cost control and the need for enhanced systems to improved forecasting and risk management. But month-end financial reporting cycles don’t stop, and the daily transactional work of collections and payments grinds on. How often do companies lack the financial resources and talent they need? The answer is: frequently. One of the most common complaints we hear from our private equity clients is that their portfolio companies lack the financial resources (people and processes) to meet these new demands. Fortunately, there are highly effective options to address this area of need.
 

When to Consider Increased Financial Functionality

Turnaround and restructuring situations place new demands on the finance team, which is often operating in “crisis” mode. COVID-19—with its widespread economic impact and existential threat to many companies—underlined the importance of having a strong and experienced finance team. Immediate needs for cash management, cost reduction and financing surfaced. For too many, it was a brave new world of navigating the CARES Act, government funding assistance, debt relief, landlord and vendor negotiations and supply chain disruptions.

As the M&A market continues to be hot, we are again seeing our private equity clients focus on how to create value with their new acquisitions. While sales and operations take center stage, the need to improve the portfolio company’s finance and accounting functions is very often a pressing issue. The new owners recognize the need for accurate and timely reporting to drive and monitor their new strategies and action plans. In a carve-out acquisition, the finance function may not even exist within the acquired division. The questions often start during due diligence. Is the finance team capable? What is the quality of the financial reporting? Are their processes efficient? What about the financial controls?

Other situations, including refinancing, restructuring, mergers, major investments and divestments, can present similar challenges. There is often an unforeseen resignation of a senior finance professional or the owners and other stakeholders simply lose faith in their finance leadership, and then a “clean break” is desired.
 

Leveraging Interim Financial Management

How are these situations being addressed? Finding qualified financial leadership positions like the chief financial officer (CFO), controller or treasurer can take months of recruiting, interviewing and onboarding. Many companies simply can’t wait that long to resolve these financial management shortfalls. A relevant and current example is the CFO who proves incapable of handling a COVID-19-driven restructuring, or the nonexistent financial leaders for the acquisition of a division of a corporation with centralized finance and accounting functions.

To fill this void, there has been a growing use of interim managers to take on the CFO role. Often labeled “Interim Financial Management,” BDO Consulting Group, LLC and other firms are providing senior professionals for positions within finance and accounting in a variety of these situations. We have tapped a pool of experienced finance executives and senior managers who can be deployed quickly and efficiently. Depending on the immediate needs of the situation, their assignments can last several weeks to upward of six months or until permanent solutions are found and onboarded.

Recent examples for BDO Consulting Group professionals fulfilling this need include serving as interim CFO for a large middle-market carve-out acquisition and as interim chief accounting officer for a $1 billion-plus multinational retailer implementing new systems and financial reporting processes, as further explained below. In many situations, we have augmented interim leadership positions with experienced staff to provide comprehensive and cost-effective solutions for our middle-market clients. From establishing financial reporting formats to the processes and protocols for the accounting and finance functions, these interim teams can create a roadmap for the full-time team. This allows the new team to hit the ground running when they start and facilitates numerous initiatives to be commenced and implemented while the recruitment process takes place.
 

Common Use Cases for Interim Financial Management

Interim Financial Management professionals can be valuable resources to employ, especially in transactional or transitional situations when the current finance team lacks the experience or resources. For example:
  • Acquisitions often require building or enhancing the finance and accounting functions:
    • Many carve-out acquisitions require significant financial functionality that was previously done by the parent company, including the CFO, controller, treasurer and financial planning and analysis (FP&A) lead roles.
    • Merger situations or bolt-on acquisitions create increased need for financial functionality and consolidation of accounting and reporting, especially if a new “holding” company is created.
    • Family-owned businesses suddenly acquired by large, cutting-edge financial or corporate institutions can quickly become overwhelmed by the new financial and managerial requirements, such as external and internal reporting packages with KPIs (key performance indicators).
  • A company sale or an initial public offering might require a more experienced CFO to lead the arduous documentation efforts and facilitate the sale process, including participation in management presentations.
  • Turnaround and restructuring situations require keen strategic and tactical capabilities to stabilize the losses and liquidity, turn around the operations, seek new funding or, if necessary, help a company navigate the bankruptcy process. Crisis management, cash management and negotiating skills are critical needs.
In each of these situations, Interim Financial Management professionals will typically:
  • Provide immediate strategy and bandwidth to move the finance function forward
  • Assess existing processes for potential “re-engineering” opportunities to improve efficiency, controls and/or reporting (e.g., faster month-end reporting)
  • Assess the current workforce for potential re-organization or “upgrading” of positions
  • Help recruit new resources to provide the enhanced functionality, including their permanent replacements
  • Deal effectively with the increasing demands of lenders and investors
In addition to providing continuity with the day-to-day requirements within the finance and accounting functions, Interim Financial Management professionals offer CEOs, boards and private equity sponsors the support and flexibility they need in times of transition. These knowledgeable professionals understand the nuances and specific needs associated with organizational change, and they focus on establishing the new functionality to permanently implement the revised processes. They possess directly relevant experience (functional, situational, industry-related, etc.) while supporting management in their search for a permanent solution, and, importantly, they provide transition support and training to the permanent replacements. Availing of this unique skillset and service offering can be an effective strategy to minimize disruption, implement a smooth transition and establish a solid future course for the accounting and finance functions.

$1B+ International Fashion Retailer

The Chief Financial Officer engaged BDO to perform a comprehensive assessment of the company’s finance functions, including staff assessments, organizational redesign and process improvements. BDO provided significant transformational recommendations for a corporate accounting reorganization and relocation and upgrades to the financial planning and analysis, tax and treasury functions.

BDO Consulting Group, LLC professionals were subsequently engaged as Interim Chief Accounting Officer and Interim Financial Reporting Manager to help lead the corporate accounting function and assist with the transformation, including a planned change in ownership. We are currently serving in an external reporting capacity, enhancing reporting and developing processes to stabilize the company for future periods.

Select BDO Consulting Group services provided include:
  • Reorganized the accounting processes
  • Significantly improved the monthly financial reporting cycle, reducing P&L close to five days and balance sheet close to eight days
  • Prepared monthly, quarterly and annual financial statements
  • Assessed and addressed personnel gaps and processes for accounting, financial reporting and tax functions
  • Improved corporate recordkeeping and accounting for stock compensation, equity distributions and financial instruments with embedded derivatives
  • Liaised with internal and external stakeholders including material shareholders and debtholders in periodic and ad-hoc reporting requests
  • Completed critical accounting projects
  • Managed implementation of ASC 842 lease accounting project involving over 2,500 leases and a search for embedded leases
  • Assisted with the steps required for a planned change in ownership
 
In addition, the client has engaged the BDO Tax team in co-sourcing tax preparation and international tax support projects, including transfer pricing work.




 


 
Restructuring and turnaround services as well as operational value creation services within the United States are offered through BDO Consulting Group, LLC, a separate legal entity and affiliated company of BDO USA, LLP, a Delaware limited liability partnership and national professional services firm. Certain restructuring and turnaround services may not be available to attest clients of BDO USA under the rules and regulations of public accounting.