One of the mantras of entrepreneurial life is that no one ever gets rich on a salary. Yes, you can be comfortably off or even extremely well to do, but when it comes to acquiring real wealth the secret is to secure an equity stake in a successful company.
The game plan that begins with a start-up and ends with a lucrative exit is built into the DNA of entrepreneurs, and many are prepared to work for years for little reward while keeping their eyes firmly on the prize of the big payoff. Meanwhile members of the management team beaver away, knowing that their own share of the proceeds will at best be limited.
Hence the appeal of the management buyout (MBO). As the founder – or a corporate owner - prepares for exit number one, managers have an opportunity to put their own game plan into play. Bring in a private equity backer, buy the business, implement a growth strategy and work relentlessly towards exit number two in five to 10 years' time.
Typically, MBOs are fronted by the chief executive but in theory at least they should also be good news for ambitious chief financial officers. It's not just about taking an equity stake and cash in some time in the future. Private equity backed buyouts are inevitably predicated on the kind of rapid growth that will deliver a significant return for the investors.
For the finance chief, there is an opportunity to shift up a gear – perhaps making the transition from financial controller to a commercially minded partner or even the chief executive. And in doing so, new doors open. One successful buyout on the CV may well pave the way for a new and lucrative career path if you chose to step out of pure finance.
But that's only if you can successfully ride the, oft heated, train that leads from a 'pre' to 'post' buyout environment. Private equity backers are known for their forensic scrutiny of prospective management teams and they won't hesitate to replace any individual who is not perceived as up to the job. If the CEO is not up to scratch, the deal probably won't happen but if there are questions marks over the CFO, he or she will simply be replaced.
So a CFO looking seriously at taking part in a buyout transaction should look long and hard at how the role will evolve after the transaction as well as the expectations of private equity backers.
According to Alan McBride – former finance chief and current CEO and principal consultant at recruitment firm Camino partners – the biggest obstacle facing pre-buyout CFOs is often their lack of experience. McBride specialises in finding suitably qualified CFOs for private equity-backed companies and as he sees it, the skillsets offered by the incumbent CFOs often fail to match the expectations of investors.
"If you take the example of an owner-managed business, an FD in that environment may well be doing the job of a financial controller," he says. "Private equity investors will be looking for someone who can show evidence of a greater independence of mind – someone who can provide a bridge between the CEO and themselves."
And if the incumbent finance chief falls short, McBride says they will likely get short shrift. "In my experience, private equity people tend to be very focused," says McBride. "They want to reduce the risks and generally they want someone with sector experience who has worked previously in a PE-backed environment."