There are of course risks associated with breaking up a tightly-knit management team, but as Hedley Mayor, CFO of AIM-listed software company System C (and former CFO of private equity company Octopus Investment) observes, in many cases the finance chief will be semi-detached from the other managers.
"What you often find is that an FD has been brought in at some stage, often in the role of financial controller. The company probably didn't have an FD before and the new man isn't really part of the team."
So the existing head of finance may be doubly vulnerable. Not quite meeting the specifications of the incoming private equity investors and not having the personal ties with other managers that might help protect his position.
Nevertheless, CFOs can and do make the MBO transition. Richard Fetterman of corporate finance advisors Livingstone says that although the PE industry might prefer to draw from the ranks of those with previous form, the door is still open for talented CFOs to walk through.
"No one actually has experience until they get experience," he says. "It's certainly not unknown for a finance director who hasn't had experience of a PE-backed company to make the transition."
Greater pressures
Those that do almost inevitably find themselves recalibrating their role to meet the requirements of the financial backers, who will be seeking constant assurance that their investment is on target to deliver a handsome return.
As Mayor says, that means taking a different perspective on the financial progress of the company. "Typically a privately owned company won't be that concerned about year-end results," says Mayor.
"As long as order books are healthy and the company is making a profit, the owner won't be too worried about the year in which the profits fall. In contrast, private equity backers will want to see the profits dropping into the right years."
And the reporting regime is likely to be more onerous. Harvey Mitchell, now a principal partner at part time FD provider Orchard Growth Partners was finance chief at Blue Pumpkin Software before and after a management buy-out, when it was bought from its corporate owner and dropped into a vehicle named Optimis.
"A lot of FDs – even in plc companies – are accustomed to providing accurate figures only on a quarterly basis," he says. "When the investor is private equity finance partner you'll have to provide accurate figures every month."
Looking forward, the likelihood is that the new backers will expect forecasts that are more comprehensive than those required by the previous owner. "The forecasting has to be very robust," says Mayor. "Investors will be looking for complex forecasts that can be sensitised in line with 'what if' scenarios."
Given that the majority of MBOs are funded by leveraged private equity investment or bank loans, the progress of the business has to be seen in the context of the debt on its balance sheet. "Cash management skills are essential," says Alan McBride. "They have to be because of the debt that the business will have taken on."
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