A 3-step cheat sheet to help CFOs prepare for a rebounding economy

On April 2nd, 2024, Accordion’s CEO & Founder Nick Leopard appeared in Forbes to discuss how CFO can ensure success in a growth market. The secret? Preparing for it, even if it seems premature.

If private equity sponsors are bulls, their portfolio company CFOs are acting more like bears.

It’s a totally understandable disconnect. Sponsors have spent the past few years urging management to institute as much fiscal discipline as possible: cut costs, optimize cash flow, push accounts payable and accelerate accounts receivable. At the risk of mixing metaphors, they now need their bears to skate to where the puck is headed: a rebounding economy ripe with deals and exits.

For PE-backed CFOs that’s going to be a critically important pivot, requiring them to use three essential muscle groups they may not have exercised of late (or at all):

1. Use predictive data analysis.

Our company’s 2023 State of the PE Sponsor & CFO Relationship survey found that the vast majority of sponsors say their portfolio company CFOs are not meeting their data and reporting expectations.

Why? Because they’re still looking in the rear-view mirror. A rebounding economy requires that companies look forward to seize market opportunities. But building a leading indicator-based outlook from which management can make more informed day-to-day decisions hasn’t yet become a part of the modern CFO’s wheelhouse. Maybe that’s because historically the tech hasn’t been sufficient to support predictive analysis. Or maybe it’s because looking outside of traditional financial metrics hasn’t been part of finance’s purview.

Either way, it’s a problem—or it’s at least a missed opportunity in a growth market, where identifying hidden influences can make the difference between preserving value and actually driving growth. The good news is it’s a problem that can be fixed.

Technology can now enable CFOs to use predictive analytics by leveraging cohort and churn data and by tracking innovation. But to be successful using newer-wave data, CFOs must work in partnership with business unit leaders who can help integrate a broader range of inputs alongside financial data. If done correctly, CFOs won’t necessarily have a crystal ball—but they’ll have the closest thing to it.

The 2024 Data Mandate: Look forward to unlock hidden growth opportunities.

2. Plan now for M&A later.

Companies with proven M&A integration machines command a premium. This isn’t just conjecture; it’s based on data. While inexperienced acquirers create an initial pop in shareholder returns, it’s the serial acquirers with the proven ability to integrate acquisitions who deliver long-term total shareholder return (at an average of 1.42% over two years).

Sponsors know this. They understand the multiple potential for portfolio companies that can leverage a repeatable acquisition playbook. So, it’s no wonder they are prioritizing M&A.

But if you need more proof that sponsors are looking forward to a future economic state, while CFOs are still stuck in a down-market mentality, look no further than the gulf that exists around deal-making. Despite sponsor prioritization, CFOs still rank M&A as dead last on the list of areas where finance should focus.

This is a big problem for CFOs who may not realize that their sponsors are already thinking ahead to accelerated deal activity. It’s an even bigger problem for CFOs who are usually tasked with merger integration and therefore held responsible for demonstrating merger muscle memory.

The so what? CFOs must start designing and/or updating their playbook to handle integrations, now—or risk scrambling to try to incorporate multiple transactions at once, likely missing windows to take advantage of synergies.

The 2024 M&A Mandate: Prove your M&A muscle to command market premiums.

3. Prioritize pre-exit transformation.

Sponsors also told us that sell-side readiness is a value creator in and of itself. That’s a critical point as sponsors begin to think about exits and IPOs in a rebounding economy.

And it’s a nuanced point given how dramatically the IPO landscape has shifted to reward exit readiness. Buyers are now prioritizing enhanced financial performance and operational efficiency in the critical months leading up to an IPO. This change reflects a broader shift in investor preferences, moving away from the growth at all costs philosophy to a more balanced approach that values profitability and financial prudence.

That means CFOs need to work (now!) on initiatives that will make their company more exit ready over the next year or two. The journey toward exit readiness is not just about isolated strategic changes. Instead, it’s about a comprehensive transformation that a company undergoes. This transformation encompasses profitability paths, EBITDA improvements, financial discipline, a compelling equity story, strategic capital allocation and working capital optimization. Such a holistic approach not only presents a promising image to potential investors but also lays a solid foundation for post-exit success.

CFOs who think this kind of transformation isn’t what their sponsors want would be mistaken. In fact, it’s exactly the kind of projects PE partners want their CFOs bringing to the table. Ninety-eight percent of sponsors believe that portfolio company CFOs must take a lead role in driving enterprise-wide transformation. In terms of the type of transformation they want to see their CFOs lead, it’s all-encompassing, from digitizing the finance function, to liquidity enhancement and more operational-specific profitability improvement.

The 2024 Transformation Mandate: Get ready to get exit ready.

Sponsors want to take quick advantage of a rebounding economy. Smart CFOs understand that ensuring success in a growth market means preparing for it, even if it seems premature. By leveraging predictive analytics, building M&A machinery and tackling pre-exit transformation, CFOs can help write the playbook for what winning will look like across the remainder of the year ahead.