What kind CFO should you hire if you plan on selling your company? I asked my friend Rich, a CFO and a pretty darn good one at that, who's on his third start-up (made money on one, nothin' on the next, but we've all got our finger's crossed now). Rich says it doesn't matter because the CFO is the first one layed off after the deal closes. Well, he's right, but I think the CFO position is a critical hire if you plan on being acquired. BTW - it's a completely different hire if you plan on going public.
There are two areas of significance here: (i) internal financial systems and controls; and (ii) expectations and compensation structure. Again, there are several other important considerations when hiring the right CFO, but from the corporate buyer's perspective these are the most important, because yes, we will lay off the CFO as soon as the ink's dry. This post will focus on setting proper expectations and compensation.
There is an uncomfortable conversation that happens to me in just about every deal, and it doesn't have to happen. Usually a week after the LOI is signed and right when due diligence is starting, the target's CFO approaches me and asks, "Are you going to keep me?" Many in my profession lie at that point. I don't. The answer is almost always no, but I go on to praise their work, give a pep talk on finishing strong and offer assistance and a reference in finding new work (that's how I got to know Rich). It behooves me to do so, but I shouldn't have to. An unmotivated, scared, angry CFO who is looking for a new job will never get us through due diligence. It's rare, but I've even seen sell-side CFOs try to kill deals in order to save their jobs. You can take care of this long before the LOI is signed:
- Set expectations right when you hire - "Our plan is to sell the company in three years. You'll probably be out of a job at that point. Are you OK with that?"
- Use a heavy amount of stock-based compensation. As a buyer, I'm not a big fan of wide-spread employee windfalls as a result of a sale. But I have no problem with CFOs getting a nice chunk of money - they earn it for what I put them through in the process.
- Pay your CFO a monthly cash bonus (25% of their salary is standard) during due diligence. When they are working 20 hours a day and six days a week, this will keep their spouse quite and happy.
Aligning your CFO's interests with yours will make all of our jobs easier and improve the chances for success.