How Does an Interim Management Executive Provide Value?

Interim Management Executives Can Help in a Crisis

In a crisis situation, having experienced resources to rely on can make or break a company’s response. Sometimes, an existing team is able to rise to the challenge but what if, for a variety of reasons, there is no one at a management level who is able to fill a key leadership role? The best answer may be to retain an interim management executive.

Private equity, venture capital, and investment management professionals have often used interim executives to support portfolio companies when retaining a full-time operating partner or replacing a highly compensated executive that does not properly serve the business in its short-term goals. In fact, this solution can also be initiated directly by a business owner to address the same type of issues and to help their company deal with distress or to more effectively pivot to a new strategic direction.

As former executive officers, consultants, and investment bankers, interim management professionals provide the operational and transactional experience to oversee boots-on-the-ground accounting, finance, performance improvement, sales, marketing, and cash management functions, while also affording companies with valuable merger and acquisition (M&A), investment evaluation, and capital-raising knowledge. Interim executives augment the capabilities of a well-trained technical manager with the skills of a strategic investor.

Contractor vs. Interim Management Executive

For business owners, it is likely that they have engaged a contractor to complete a project or perform a set of prearranged tasks. So, what is the difference between an interim executive and a contractor? The answer is linked to the services being provided.

Simply put, a contractor (e.g., outside accounting firm, social media/marketing consultant, information technology [IT] administrator, product strategist, etc.) should be used when a specific objective can be performed, and that objective is independent of the strategic development of the business. For instance, contract accountants are an effective resource for logging accounting entries, performing month-end closings, paying bills, issuing invoices, and reconciling bank accounts. However, they are not typically the ideal resource for developing financial projections, forecasting inventory, planning cash flows, or managing lender and investor relationships. These strategic tasks benefit from the guidance of an experienced leader who is not only technically savvy in finance and accounting, but who also has broad experience with and knowledge of the operational and sales functions of the business. In order to properly advise on financial projections, this executive must be able to understand and scrutinize the assumptions and parameters driving the company’s forecasts, contribution margins, inventory lead times, borrowing capacity, and distribution tactics.

Ultimately, if a business needs help performing a well-defined set of tasks, contractors are a cost-effective way to address that need. They can do the work and train full-time employees to take over the responsibilities going forward. But, if the business would benefit from a strategic leader, who can analyze the cross-functional needs of the business and manage the implementation of a holistic process, this often exceeds the scope and skills of a contractor and is more successfully filled by an interim management professional.

Responsibilities of an Interim Management Executive

The experience of a company’s management team and the objective at hand will determine the type of interim executive that will provide the most value:

• Interim Chief Financial Officer (CFO): An interim CFO has extensive experience as a corporate consultant, company CFO, or investment banker. These executives are experts at analyzing investment opportunities, developing and maintaining forecasts and financial budgets, raising capital, communicating with lenders and investors, systematizing accounting processes, integrating enterprise resource planning systems, and supporting activities around mergers and acquisitions, such as sell-side preparations or merger integrations.

• Interim Chief Operating Officer (COO): An interim COO also has a strong background in finance while providing a deeper understanding of product development, sales and marketing, supply chain management, and corporate administration (such as projects related to human resources and information technology). Operationally-focused interim managers support CEO and CFO teams with the implementation of new strategies across the company. This might include procurement and distribution enhancements, logistics planning, cost-cutting initiatives, quality improvements, or process and policy developments.

• Interim Chief Executive Officer (CEO): Less common among middle market companies, but extremely beneficial in certain circumstances, an interim CEO is an experienced executive who can parachute into a business and immediately represent the brand. In cases where an interim CEO is engaged, the company may have lost its chief executive, and in order to quickly stabilize the business, an interim CEO is hired to lead employees, communicate with lenders and investors, and make swift decisions.

Interim Management in Practice

Interim managers are engaged in a variety of scenarios, but they are typically hired under one of the following circumstances:

• Business Growth: A growing business may lack the resources or management expertise to prepare for a transaction, manage increasing financial obligations, analyze investment opportunities, or construct robust financial plans that support business strategies.

• Unexpected Departure: A business that experiences the unexpected departure of a senior leader needs an executive manager who can start immediately, organize and prioritize functional projects, and support a team of technical contributors.

• Crisis Management: A business in crisis is usually on poor terms with its financial stakeholders, and in the event these stakeholders have not already required the use of an interim executive, a company can proactively seek support from an interim manager to alleviate tensions between the company and external parties.

Case Studies

Here are some examples from our experience of situations that can arise and the value the right interim management professional can bring to the solution:

Scenario 1: Revenue Does Not Solve All Problems

“Revenue solves all problems” is an optimistic philosophy that many business owners convince themselves is true. With companies experiencing historical levels of new investment, and lenders chasing new originations, financial support seems endless. Yet, for most businesses outside of the venture world, managing a company toward consistent earnings provides stakeholders with the greatest opportunity for returns.

While a retail goods manufacturer and distributor grew 140% in three years to over $150 million in revenue, the company struggled to manage cash and was surviving on EBITDA margins of less than 3%. With five of the company’s seven senior level managers tasked with sales and new business development, the financial and operational teams were overwhelmed with managing new orders. Cash flow was deteriorating, and customer orders were being short-shipped due to lack of inventory.

The interim executive, hired by the company CEO, was brought in to overhaul the company’s cash management and fulfillment processes. In doing so, the interim executive developed a weekly cash forecast, established a new process for prioritizing and fulfilling orders, and aided in the reduction of the company’s cash conversion cycle by proactively communicating with lenders.

Scenario 2: Surprise…I quit

When a private equity-owned Software-as-a-Service (SaaS) company suffered from the unexpected departure of its CFO during a critical period where the business was undergoing an audit, implementing a new enterprise resource planning (ERP) system, and transitioning to proper ASC 606 revenue recognition compliance, the sponsor needed a quick solution to fill its executive management void.

Hiring a new CFO would take months, but an interim CFO could start tomorrow. With the interim CFO engaged, the company completed its revenue recognition transition and developed a clear set of policies used to train team members; managed the IT, operational, and accounting needs required to fully integrate the ERP software; and provided the expertise required to answer questions and support the needs of the auditor. The assignment also enabled a probing of other areas of concern where a pricing flaw had increased churn of the company’s highest paying customers. In a simple but strategic move, the interim CFO created a process to elevate customer cancellations to the office of the President who could triage issues and provide solutions for frustrated clients. By engaging the interim CFO, the sponsor was able to manage the short-term needs of the portfolio company while identifying a permanent CFO who could be trained and transitioned into the business.

Scenario 3: Transactional Crisis

Business owners face myriad challenges as they prepare and manage for an M&A transaction within their company. When a deal goes south, employees and owners become frustrated and lose motivation.

Following an unsuccessful business sale, and the resignation of the company CFO, a sponsor owned IT management company needed an experienced leader, skilled in sell-side preparation, with additional abilities in buy-side diligence, business integrations, and back-office management, to reengage the company in its sale process. The private equity firm did not have time to locate a permanent replacement for the position, nor was there interest in surrendering additional equity to a new executive before a sale. By hiring an interim executive, the sponsor was able to quickly supply the company with a trusted operator who could support a variety of critical functions. While additional expenses were required for travel of the interim executive, these were treated as abnormal expenses and added back to earnings during the sale process, ensuring that the expected purchase price was unchanged.

Taking Action

Hiring an interim executive provides a quick and strategic solution for companies experiencing difficult organizational changes. When facing the unexpected, time is of the essence – acting quickly before issues worsen and options disappear will give your interim executive and your business a stronger chance of achieving a successful outcome.

If you have questions regarding interim management or are interested in engaging an interim executive, Capstone’s Financial Advisory Services team specializes in working with middle market companies and financial stakeholders to stabilize, rehabilitate, and grow companies. Please contact us to discuss your specific challenges and how we can help you resolve them.