Heading to private-equity funding poses challenges for CFOs.

• Author: Harwell, Joey
• Position: Private companies

Even in the best of times companies owned by private equity firms are a world unto themselves. The current economic climate has made top financial jobs in private-equity portfolio companies even more challenging.

If you're considering a move to a firm owned by a private equity sponsor--or the chief executive office in a family business that has been bought out--the landscape looks drastically different now in three ways:

1. Relationship with the sponsors;

2. Higher expectations for analysis, reporting and modeling scenarios, especially if you are used to the informal reporting process found in many family owned businesses; and

3. An intense emphasis on control and precise decision-making for cash, working capital and capital expenditures.

In a private-equity situation, the chief financial officer can often have as much contact with the sponsors as the CEO. Circumstances vary, but the sponsor typically looks to the CFO for a reality check on the CEO's message. For instance, are projections on target?

A managing partner at a leading venture capital firm in Nashville likes to paint a picture of two people driving the same car: the CEO is the driver, the gas-pedal guy; the CFO is the devil's advocate, the brake-pedal guy.

The sponsors want a candid second opinion, but they also want the CFO to be the CEO's partner. That can place CFOs in a vice.

The successful CFO needs sophisticated political skills and the ability to develop a strong relationship with the CEO that can withstand differences of opinion and independent communication with private equity investor(s).

Public companies are, of course, no strangers to sophisticated analysis and reporting. But it can be a different story in a family-run business.

Many family firms create a budget and track the results during the year. Under private equity, it's not uncommon to go to an iterative forecasting model that starts with an annual budget and then requires that the remainder of the year be re-forecast every quarter. Monthly updates are not unheard of if results are significantly unfavorable.

But perhaps the hardest thing for new CFOs in private equity deals is the expectation for modeling liquidity events. For example: "What happens if we sell this business we bought for $80 million for $ 120 million. What does that mean?" CFOs then have to play out the consequences all the way through to every common shareholder and optionee--an exercise typically not performed in a family business.

The demand...