Interim, or temporary, chief financial officers, known as fractional CFOs in the industry, have become an important and increasing part of business growth in Orange County, according to private equity companies and agencies that place the executives.
Exact numbers were unavailable for all OC businesses that use fractional CFOs, though the two local temporary CFO placement firms interviewed said they service a combined 300 to 350 clients in Orange County and that they each need to hire 150 to 175 additional professionals this year to manage requests from new clients or existing clients with new needs.
Neither company would provide its rates but both said they’ve heard of other companies charging $250 to $300 per hour for CFO work. The placement agencies keep about a third of the income.
The hourly rate may seem costly, but fractional CFOs are typically hired for just three to six months in order to solve a financial problem.
The typical permanent CFO at an Orange County company with less than $50 million in revenue earns about $175,000 a year, not including a bonus, according to Irvine-based Alliance Resource Group, an accountant placement firm. Companies reporting more than $500 million annually earn about $350,000 in salary and a bonus of about $600,000.
A small company benefits from using a fractional CFO for project work by gaining years’ worth of knowledge from someone who has financed and developed companies through difficult phases of growth.
A CFO’s lack of operational experience can become evident as a business grows or as the owners begin to consider selling the company or seek venture capital or private equity investment, said Dan Lubeck, founder and managing director of Newport Beach-based private equity firm Solis Capital.
Solis specializes in investing $2 million to $5 million in lower middle-market companies that generate $15 million to $150 million in revenue, the kinds of businesses that make up a big part of OC’s economy.
“Usually entrepreneurs have not invested in the type of CFO that is needed to support their company’s growth,” Lubeck said.
He said Solis is usually a 50/50 partner with the owners of its portfolio companies, though his firm reserves one right: to replace a company’s CFO prior to investing in it.
“It’s more than just accurate financials; it’s also the proper evaluation of a company, forecasting and financing the company’s future activities, being able to work with senior lenders to structure capital, and understanding the company’s costs and margins,” Lubeck said.
Solis audits companies prior to placing an investment to determine whether it believes a new CFO is needed. If its auditors’ report matches the company’s, then it’s typically good to go with the existing CFO.
Lubeck said Solis prefers to immediately search for and place a permanent CFO in a company, though he understands the role of a fractional CFO in a growing firm. “A good part-time CFO can help a smaller company deal with big-picture issues, such as preparing for an audit, which is beyond the experience of most controllers.”
Controllers have a better sense of a company’s past financial history as represented by its credits and debits, for example, while CFOs have more knowledge of Generally Accepted Accounting Principles, deferred revenue requirements, and managing the company’s future financial requirements.
Fractional CFOs essentially “parachute” into companies to solve a specific problem that must be resolved in a fixed amount of time, said Lawrence Greaves, co-founder of ETONIEN, a firm with a Newport Beach office that provides fractional CFO services to 200 local private equity portfolio companies and 60 of the Fortune 1000 companies in Southern California.
“What most CFOs and companies learn about each other in six months, my CFOs have to learn in about a week,” Greaves said.
He plans to hire an additional 200 professionals this year. Greaves said he didn’t know whether they would be dedicated solely to Orange County or whether they would also work in other parts of Southern California.
“The lower middle-market companies are surging in Orange County,” he said, “but oftentimes the owner or entrepreneur usually has a strong background in sales, marketing or technology development.”
Owners typically lack experience forecasting their company’s growth, the future cost of running the business or purchasing needed materials, or obtaining the capital needed to support that growth, Greaves said.
Fractional CFOs can help with raising capital, installing computer systems, providing required GAAP reports to banks and investors, and creating a book of financials to be reviewed by auditors and prospective investors.
The temporary executives usually exit after solving a company’s financial problems, though Greaves said it would be a mistake to compare them with traditional staffing agencies or accounting firms. Fractional CFOs create the financial reports that are audited by certified financial accountants and required of companies seeking venture capital or private equity investors.
Another need for fractional CFOs occurs when a company is struggling with cash flow, when margin problems appear, or when investors or banks begin to complain about financial covenants, said T.J. Delight, a partner in Salt Lake City, Utah-based CFO outsourcing firm NowCFO and manager of the company’s Orange County office.
“Part-time CFOs also need to have great social skills,” he said. His professionals may work at a small software development firm for a month, then at a medical device maker for half a year, so they must adapt quickly to new corporate cultures.
It’s important that temporary CFOs become part of a company in order to uncover the various problems or misunderstandings that occur in its finance department, Delight said. They can more easily unearth those struggles after employees become comfortable opening up to them.
It also helps to be a motivated problem solver and have ample corporate experience.
“The ideal part-time CFO or fractional CFO likes a challenge, is flexible and wants to be tested,” Delight said.
Those executives will have a history of successfully financing companies through various stages of growth or developing new departments at a larger company.
Sometimes temporary CFOs will split their work weeks between two clients, Delight said. “In a few cases, a client will only have enough work to occupy a part-time CFO for a day [each week].”
ETONIEN and NowCFO, however, pay full-time salaries and benefits to their CFOs, despite the temporary nature of the work. The professionals file a W-2 form and receive vacation time and healthcare from their agencies.
Both Greaves and Delight said they anticipate their business will increase in the coming years as current clients grow in size, as aspiring entrepreneurs leave employers to start new companies, and as new companies decide to use their existing capital more prudently.
“It’s really exciting when a company is resource-constrained,” Greaves said, explaining that that’s when temporary CFOs display their problem-solving skills.
Sometimes the placements become permanent. The placement agencies said they lose about a third of their CFO stables each year when the parachuting executives find they’ve made a fit for the long haul.
There are times when a younger CFO finds a great match with a burgeoning company, for instance.
“This really isn’t a profession filled with people in the twilight of their careers,” Greaves said. “There are a lot of very talented people affected by the recession in 2008 to 2010 in the middle of their careers.”
