As businesses grow, their financial needs become more complicated. Businesses usually start out managing basic transactions, but as they expand their transactions become more complex, often requiring a heightened level of analysis and more robust systems and processes. Eventually, the company needs to move beyond the basics and create a more sophisticated financial strategy. While more basic financial needs can be handled by most finance professionals, a CFO will be necessary when it comes to complex transactions or strategic moves. This article will help any business with the strategic goal of an initial public offering (IPO) or other type of exit (such as an acquisition or buy-out) by showing them the benefits and process of hiring a Chief Financial Officer (CFO) as part of their preparation. A CFO with the right background and insight is critical. CFOs with IPO experience can be hard to come by, but they can provide valuable insights into expanding your business or obtaining funding. In addition, it is the CEO and CFO who will actually be verbally selling the company to prospective investors in the IPO. If the CFO can’t fulfill that role effectively, the IPO will fail. This article will help you, as a leader in your company, understand the following elements of hiring a CFO, especially in preparation for an IPO.
- The Role of the CFO
- Where to Find a CFO
- How to Attract a CFO to Your Company
- The Cost of a CFO
- When to Hire a CFO
- The Qualifications to Look for in a CFO
- How a CFO Could Change Your Team
The Role of the CFO
As one of the key decision makers in a business, CFOs are sometimes referred to as stewards over companies and their assets. A CFO has a responsibility to look ahead with a long-term view while balancing the short-term demands of shareholders. A CFO must also convince shareholders of the benefits of their balanced vision for the company. Additionally, CFOs must have a strong understanding of the business to communicate to investors how it can create long-term value and results through the correct prioritization of initiatives. Their expertise and experience can lead companies to long-term profitability and success.
One of the CFO’s most critical roles is in risk management. CFOs can identify and manage both external risks (such as pricing and rate fluctuations), and internal risks (such as ineffective controls, incomplete or inaccurate information, or weak technology). By addressing these issues, the CFO creates a risk-managed environment for their company. The CFO will also have the responsibility to fulfill other roles, such as providing leadership, direction, and management for the finance and accounting teams, interfacing with bankers, investors and analysts to manage the company’s market strategy, and ensuring compliance with regulator financial requirements. The CFO will sign off on public financial filings to assert they are complete and accurate, and will be responsible for the planning, implementation, and managing of all the financial activities of a company. This includes business planning, budgeting, forecasting, and negotiations.
In recent years, the role of a CFO has expanded from traditional finance roles (such as budgeting, accounting, controlling, and planning and analysis) to include other roles such as specialty finance (such as investor relations, treasury, audit, and tax) and nonfinance roles. Although the traditional roles are still important, CFOs have developed other specialty and nonfinance roles to continue to add value and help their companies remain competitive. Of the time that CFOs spend on specialty and non-financial work, the majority of that time is spent on strategic leadership, organizational transformation, performance management, and capital allocation (McKinsey; Special).
Many CFOs have also taken on the role of digitization to improve performance of both their finance and nonfinance roles. Digitization helps them improve not only their own roles and performance, but also the roles and performance of those who report to them. Automating or digitizing some of the more basic tasks can leave the CFO and employees more time to make value-adding decisions or analyses. Some CFOs are working to improve accuracy and efficiency of reports through automation and robotic processes. CFOs are also using data visualization to analyze financial data for better long-term decision making (McKinsey).
Where to Find a CFO
The role of a CFO may be essential in a growing business, especially if it is headed towards an IPO. Once the need for a CFO’s skills has been established, the next question must be answered: Where can a CFO be hired? In short, there are two possible places from which you could hire a CFO: internally or externally.
Hiring a CFO internally has many potentially benefits. Internal employees already have a robust understanding of the company and its industry. They may not require as much training or onboarding, and they’ve already proven their loyalty and integrity with the company. These factors can make internal employees a strong candidate for the CFO position if they are qualified.
Training your own CFO internally could also increase diversity in the C-suite. Recently, there has been a push for more diversity mainly in the board of directors, but also in the C-Suite. Goldman Sachs has already announced that as of summer 2020, it will not help companies go public without at least one diverse board member (Larcker). Despite these pushes for greater diversity, women and racial minorities are still underrepresented on boards, in C-suite roles, and in roles that directly feed into C-suite positions. A study of Fortune 100 companies published by Stanford Business in April 2020 states that “The CFO role is the least racially diverse position in the C-suite. There are only 4 CFOs who are not white” (Larcker). While training and hiring your CFO from within your company could potentially help increase diversity in the C-suite, many growing companies either do not have robust training systems in place or do not have the time to hire and train a financial team in the short period before their opportunity for an IPO.
If no internal employees are qualified or positioned to be the CFO, the next place to look is externally. Generally, companies will first leverage their connections to find potential candidates for the role of CFO. If a qualified candidate is not found, you can also choose to hire an executive search firm. The firm you select should have detailed knowledge of your company’s industry, and connections to people who may be qualified. They can conduct the search and interviews for you while you spend your time managing your business. Some companies also hire an executive search firm so that they can weigh internal options against the candidates found by the search firm.
How to Attract a CFO to Your Company
If you do choose to hire a CFO from an external source, you should recognize that many great CFOs are already employed elsewhere. To hire them, you will need to incentivize them to switch companies. If your company is growing, but still some months or years out from an IPO, its brand or reputation may not be well known, which can make recruiting difficult. Working for a start-up is a risk because there is a high chance of failure, especially early on. An experienced CFO will not join your company without confidence in its product or service. To attract a great CFO to a growing company, you will likely need to sell potential applicants on benefits such as the location, opportunity for career growth, or stock (equity) compensation. Providing stock compensation prior to an IPO is key because it truly makes the CFO part of the company and incentivizes them to help your company succeed. A CFO is unlikely to join your start-up without an equity stake. The company culture can also play a big role in attracting a CFO. If your applicant doesn’t think they will be welcomed by, and can get along with, the CEO and other people in the company, they will be less likely to accept the role of CFO. CFOs know they will need support to enact any necessary changes and bring greater success to their company.
The Cost of a CFO
So how much does a CFO actually cost? Generally, there are three components of a CFO’s compensation. These include salary, bonus, and stock. The amount of the salary and bonus are dependent on the size of the company and whether it is public or private. As of January 29, 2021, the average salary for the CFO of a public company (or soon to be public company) in the United States is $394,235, not including healthcare or retirement (Salary.com). The bonus can vary widely, anywhere from 30%-100% of the base salary. As for the equity based compensation, one study in 2014 showed that CFOs who take companies through an IPO generally ended up owning about 1% of the company, although the vested amount would vary based upon when they were hired (Holm). Gary Stibel, founder and CEO of New England Consulting Group, suggested that “offering the person an ownership stake in the company […] has the advantage of not only incentivizing the executive to drive performance, but also keeping the base salary lower” (Hamstra).
Altogether, a CFO’s compensation represents a significant overhead cost, especially for new companies. Because the cost is so high, many companies will put off hiring a CFO for as long as possible. This works only as long as the company’s team has the requisite skills to manage the company’s financial needs. If your company has a controller, a vice president of finance or a similar role, the person working in this role may be able to handle more complex financial issues without a CFO for a while. If your company is at an early stage and can’t handle the cost of a CFO, you may consider bringing on new people in roles like these first. However, consider the cost of not hiring a CFO, which may be higher than the cost of hiring a CFO. A seasoned CFO will be able to guide a company efficiently through transactions, fundraising rounds, and partnerships, where the benefits of having a CFO far outweigh the cost.
When to Hire a CFO
Considering how a CFO’s insights could help guide your company through crucial growth stages will help you determine when it is the right time to start thinking about hiring a CFO. If an IPO (or another significant liquidity event) is your company’s goal, an experienced CFO can help with that transition. They often have connections in the startup world and can help the company take advantage of opportunities to expand, cut unnecessary costs, or adjust product mix to increase profit. In addition, the earlier the CFO starts, the more time she will have to learn the ins and outs of the company and the better communicator she will be when it comes time to pitch the company to investors.
Although all these factors will contribute to the decision of when to hire a CFO, remember that other stakeholders may also have a say in this decision. Private equity firms, auditors, and underwriters may all insist or demand that a company hire a CFO. Private equity firms will want experienced management, and auditors will want a qualified individual to lead the finance functions. Underwriters may influence the CFO decision and can even require the company to replace its current CFO if they don’t think they can take the company to market with the existing executive team.
Example: P. Terry’s Burger Stand, Hiring a CFO to Enhance Growth
In an article from Restaurant Hospitality called “Does Your Restaurant Company Need a CFO?,” P. Terry’s Burger Stand (Terry’s) serves as an example of when to hire a CFO. This Texas-based company with 18 restaurants brought in a CFO, Millicent Hawkins, to help them increase their rate of expansion. Before hiring a full-time CFO, Terry’s had been using the services of an outside firm called CFO Advisors. CEO Todd Coerver explained that the time was right to bring on a full-time CFO because Terry’s was about to go from opening one new store each year to opening six or seven in a single year. General and administrative expenses (G&A) were also in the low range of 5%-10%, so management felt comfortable with the added cost of a full-time CFO.
LJ Suzuki, founder and a fractional CFO at financial outsourcing firm CFOShare, said hiring a CFO, whether outsourced or in-house, should be considered at a time when the company is facing a period of financial risk. That [time] could come, as it did with P. Terry’s, when the company is undergoing a burst of expansion, or perhaps entering a new market. (Hamstra)
Companies considering an IPO are often growing quickly and have plans for future expansion. These factors signal that a full-time, in-house CFO may be necessary.
Although the cost of a CFO may seem high, a CFO can help your company grow and develop its earnings, which will make your company better off overall. Offering ownership can also help you keep the base salary lower while incentivizing the CFO to drive high performance. A CFO’s expertise will be essential if your company is headed towards an IPO, especially if it is growing at a rapid pace.
Qualifications to Look For in a CFO
Once a company headed towards an IPO (or exit) has decided to hire a CFO, one of the questions its management will have to confront is this: “Does our CFO need to have IPO experience for our IPO to be successful?” The answer to this question may vary and will affect the decision of where to source the CFO candidate. Ideally, the CFO that will help lead your company through an IPO should have prior IPO experience. However, given there may be difficulty in finding such experienced CFOs, there are other qualities that can help you differentiate between the most and least qualified. Experience in the following areas can make a difference at your company:
- The IPO process. Even if the candidate experienced the IPO process from a role other than CFO, familiarity with the process can be helpful. Many companies have been successful in hiring controllers or VPs of finance with IPO experience when CFOs with IPO experience were too expensive or difficult to find. A CFO with IPO experience can help guide a company through the process and avoid potential roadblocks.
- Fundraising and investor relations. In addition to being familiar with the IPO process, a CFO should have experience with fundraising in general. A good candidate will be capable of working with both private and public investor groups such as venture capital, private equity, and investment banks.
- SEC reporting. If the candidate worked at a public company, they are more likely to know these reporting requirements. Reporting requirements for the SEC are often more stringent than those used at private companies, so familiarity with them can ensure a company’s smooth transition to becoming public.
- Revenue recognition. The revenue standard (Accounting Standards Codification 606: Revenue from Contracts with Customers) is principles based, so a CFO must be able to use judgment when making financial decisions related to revenue. For more information about revenue recognition, explore our other website, RevenueHub.org.
- The industry of your company. Cameron Hyzer, CFO of ZoomInfo, says that part of the IPO process is helping investors understand your business, so the CFO needs to understand it in a very comprehensive way. To have a successful IPO, the CFO must be “convincing with investors and able to articulate what makes the business tick” (Hyzer).
- Communication skills. As mentioned above, CFOs must be able to explain their business to investors. This will become especially important during the roadshow, when company management pitches their business to potential investors. Cameron Hyzer, CFO of ZoomInfo, said he participated in these roadshows with the CEO, but it’s also important to remember that roles can change, and that they depend on the personalities and skillsets of management (Hyzer). See Overview of an IPO for more information about roadshows.
- Connections in the startup world. If you or your team members do not have these kinds of connections, a CFO could provide your company access to capital through their network (Morgan Stanley).
- Works well with the CEO. The CFO and CEO must be able to communicate well and align their goals because investors will notice instability (EY). During the roadshow and other presentations to shareholders or the press, the CFO and CEO should be unified.
To hire the best candidate, you should consider each of these qualifications and prioritize the ones most important to your company. See below for an example of a company that hired a CFO in preparation for an IPO and clearly prioritized its desired qualities in a CFO.
Example: Squarespace, Inc., Choosing a CFO
In October 2020, Squarespace, Inc. announced that as of November 1, 2020, Marcela Martin would become its CFO, with the goal of helping Squarespace improve forecasting and reporting in preparation for its IPO. Specifically, Marcela would help improve processes such as recognizing revenue, closing the books, and forecasting four to five years in advance, instead of just one. Marcela Martin was the CFO of Booking.com at the time and had previously been CFO for several other companies (WSJ). Even though Marcela has not helped a company go public in the role of CFO, she clearly has the needed communication skills and experience in revenue recognition, SEC reporting, and the technology and software industry.
Changes a CFO Could Make to Your Team
If your company is headed towards an IPO, it will soon be responsible for more reporting requirements and regulations. The CFO may find that the current team is not qualified or not large enough to handle the needs of the company during and after the IPO. In an article from EY titled, “Why the CFO is Integral to a Successful IPO,” two CFOs discussed their experience helping their companies go public. Emmanuel Thomassin, the CFO of Delivery Hero for its IPO, had to “double the size of his team to meet capital market requirements. However, he adds that announcing an IPO can help you find the talent you need, as it makes the role attractive to those with the right experience” (EY).
Patrick Moore, CFO of National Vision for its IPO, says that, “in hindsight, he would have started even earlier in his efforts to strengthen the National Vision team. ‘That six- to nine-month period before an IPO is a storm of activity, emotion and issues you have to get through,’ he says. ‘So calculate what people you think you need and then consider adding two or three more. You will very likely need those resources after you go public anyway’” (EY).
Example: ZoomInfo Technologies, Inc.
Another example of the growth you may see in your finance team comes from ZoomInfo. In an interview with Cameron Hyzer, CFO of ZoomInfo, he said that their original finance team was comprised of fifteen people when he joined the company. Within eighteen months and prior to the IPO, they had grown the team to forty-four people. When hiring new employees for the finance department, Hyzer focused on building the skillsets and capabilities of his team, including many skills that weren’t required for a private company, such as SEC reporting and investor relations. Much more scrutiny is applied to public companies than private, so candidates with experience working for public companies such as Nike, Inc. or Papa Murphy’s in the Portland area, had valuable skills. These employees were more used to the requirements and had the right mindset for reporting. To read more about building your team in preparation for an IPO, read Preparing for High Growth and an IPO: Building Your Team.
If your goal is to take your company through an IPO or another exit strategy, consider hiring a CFO sooner rather than later. A CFO can provide great insights for your business, especially if it is growing at a fast pace or planning to enter a new market. They can also help prepare your finance team to handle the reporting requirements that will be expected of a public company. Qualified individuals may be found internally or externally, but the cost may be too high until your company has grown enough to handle their compensation. As you and other leadership members at your organization consider whether to hire a CFO, consider the needs of your company, the goals you have in mind, and whether their experience and skills could help your company be successful in achieving those goals.
- Brown, Scott, Toptal. “Hiring a Startup CFO – When to Hire a CFO and Why You Need One.”
- Deloitte, “Investor Relations: What CFOs Need to Know Before an IPO.”
- EY, “Why the CFO is Integral to a Successful IPO.” 4 May 2020.
- Half, Robert. “Assembling the IPO Team: Tips for CFOs.” 6 February 2020.
- Hamstra, Mark. Restaurant Hospitality. “When is the right time to hire a CFO?” 8 January 2020.
- Holm, Kyle. Aon. “Time is Money: Exploring the Costs of Hiring a CFO in Preparation for an Initial Public Offering.” November 2014.
- Hyzer, Cameron (CFO of ZoomInfo) in an interview conducted by the author, Sept. 2020
- Kossow, Jon; Ding, Ran; and Sondej, Chris. Norwest. “When and How to Hire a CFO.”
- Larcker, David F. and Tayan, Brian. Stanford, Closer Look Series, Corporate Governance Research Initiative. “Diversity in the C-Suite” April 2020.
- Lowe, Chris. FLG Partners. “CFOs Preparing for an IPO: What Are Your Bullseyes?”
- Mark Maurer. Wall Street Journal. “Squarespace Taps New CFO to Improve Forecasting, Reporting as Company Weighs IPO.” 13 October 2020.
- McKinsey, Special Collection. “The Role of the CFO.”
- McKinsey. “The Evolution of the CFO.” 26 June 2019.
- Morgan Stanley, Shareworks. “When Should a Startup Hire a CFO?”
- Salary.com. “Chief Financial Officer Salary in the United States.”