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A Guide to Creating Your New Finance Organization

Time to move out. Now what?

It could happen when you least expect it. You get word that your company is planning to carve-out your division—and you’d better get ready to move. Your excitement —  and dread — may mirror what you felt when first leaving home, whether you were moving into a college dorm, your first apartment or maybe even your own house. This article outlines some important considerations as you prepare for a similar life-altering transition for your finance team.

Leading a finance organization though a carve-out is no small feat. In addition to maintaining business-as-usual operations, you may have to create a new organization with a new or different set of short- and long-term goals which affect your people, processes, and systems. Each divestiture has unique characteristics, but business unit carve-outs usually fall into one of the following three categories:

  1. Sale to another public company.
  2. Sale to private equity investor (PEI)
  3. Spin-off as a separate public company (IPO)

Each type comes with its own set of increasingly complex challenges, but in most cases you will need to follow a process that allows you to consider your mindset, find your baseline, create a transition plan and prepare your people. At the same time, you need to consider the impact the transition will have on your own future and career.

1. Sale to another public company

When your division is sold to another public company, the challenges are similar to leaving home and moving into a college dorm. You pack up your clothes, sheets, and TV — but you can count on a bed, desk and cafeteria meals being provided for you. You’ll need to adjust to a whole new set of rules and expectations. Back home, your parents are probably already making plans to convert your bedroom into a media room. There’s no going back.

When you’re moving from one public corporation to another, your new parent will often take care of shared back-office services and infrastructure. And you probably won’t be responsible for corporate financial concerns like investor relations, information technology, tax, and treasury. Instead, your job is to focus on untangling your organization from your current parent, managing the move, integrating into your new parent’s organization, and retaining your key people.

On top of the logistical challenges, you have to deal with mixed emotions; this is a big change for your employees—and you. In this situation, you are very likely to have limited information and will need to deal with an employee base that is anxious and uncertain. In many cases, your personal role as part of the divisional finance team can also be very uncertain.

Special considerations for this carve-out: 

Consider your mindset. 
When your division is carved out for sale to another company, there’s no way to know what will happen to your position. If your division extends the acquirer’s products or services, your role may be fairly secure—perhaps you’ll even have new opportunities for advancement. But if there is substantial overlap with the new parent, it’s possible your position may be targeted for elimination. The uncertainty can be unsettling, and you may be tempted to return that headhunter’s call—just when you’re needed most. However, consider sticking around to see what will happen. Even if your position is short-listed for elimination, your new parent will need you to help with the transition, and you’ll likely be in a strong position to negotiate a good retention plan.

Whatever you do, resist any temptation to disengage. Learn as much as you can about your new parent’s industry, products, and customers. Research your future colleagues through your personal professional network or on online sites. Regardless of the final outcome, a carve-out situation will likely create many opportunities for you to increase your personal network and build your resume by leading a well-managed transition.

Find your baseline.
It’s difficult to pull together an effective transition plan unless you know your starting point. Be sure to identify any particular requirements that the new parent company will need to support to keep your business unit operating smoothly. While most of the people, processes, and systems that will move with you are obvious, some may be harder to discern, such as shared systems and staff. You’ll have to figure out exactly what your organization is using now so you can perform a gap analysis against your new parent’s systems and processes.

Create a transition plan.
In most cases, your organization’s future end state will be clear—you will adopt your new parent’s financial processes and systems, which may be very different from the ones you’ve used in the past. You and your team will likely need to adjust to different accounting policies, close calendars, and technology. The challenge will be to set up an interim solution so that on Day One, when your division is folded into its new parent, your financial operation will be able to collect cash, pay employees and suppliers, and meet your new parent’s reporting requirements. After Day One, your goal should be to lead a more permanent adoption of the new parent’s systems and processes while meeting any synergy targets intended when the deal was struck.

Prepare your people. 
Even before the transaction is announced, the rumor mill will probably be churning among your people, creating uncertainty that can undermine your plans. You’ll need to act fast to develop a proactive communications plan to address employee concerns. Even if many decisions haven’t been made, it’s good to affirm to employees you will keep them informed on important milestones and activities as soon as it is permissible to do so. This step by itself can have a very positive impact on productivity and retention since many employees will assume the worst when communication is absent.

Try to learn as much as you can about the new organization’s employee benefits and reward programs. This will help you determine the potential impact on your people and proactively develop strategies for dealing with any significant differences. Finally, identify your key people, including those with critical hard-to-replace skills and knowledge. Share transition plans with them early in the process, and let them help develop the tactics for getting the job done. In some cases you may also want to pursue an incentive strategy, which can include financial and non-financial rewards aimed at making sure you retain the people you need most.

2. Sale to private equity investor (PEI)

Leading the transition from division to a stand-alone company is a much larger undertaking. Like moving into a new apartment where you’ll be responsible for cooking your own meals and washing your laundry, you will likely need to become self-sufficient in many areas that were previously provided by your parents. But along with new responsibility comes new freedom—as you get to decide how to arrange the furniture and what food you’ll stock in the fridge.

When your organization is carved out and sold to private equity investors, you become the leader of an independent private company—often being groomed for an IPO or later sale. You will decide which systems and processes to utilize and how you want to reward your people. However, the PEI in many cases will want to keep any additional equity investments to a minimum, so you’ll probably be working with tight budget. And your long-term planning horizon as a private company may also be relatively short.

Special considerations for this carve-out: 

Consider your mindset.
Leading your own stand-alone organization is an exciting opportunity—but it comes at a cost. You’ll quickly learn there is nowhere to hide. Your new owners are likely to be frequently looking over your shoulder to make sure their investment is protected. To them, cash is king, and they typically have little tolerance for less then stellar financial performance. Here’s your chance to shine—or fade. Make sure you are ready for the challenge.

Find your baseline.
Once again, it’s best to start by gathering your baseline information. You will need to identify the corporate services previously provided by your parent that your new stand-alone organization needs to now be capable of doing on its own. Many of these may be clear, such as tax, treasury, and corporate finance. But there are probably other, less obvious, corporate requirements that could create problems if you don’t ferret them out. Finally, you’ll also want to reevaluate the divisional systems and processes your finance organization is using now because you may wish to right-size them later to fit your smaller, stand-alone organization.

Create a transition plan.
Once you’ve identified the services previously provided by your parent company that you want to continue—you’ll need to discern how to deliver them in a cost-effective manner for your new operation. Rather than copying your parent’s complex financial systems, you will want to look for systems and modules that are more appropriate for your new organization’s size.

It’s unlikely that you’ll have your financial systems built-out by your division’s first day as a stand-alone company (Day One). Setting up transitional service agreements (TSAs) with the parent company is a common interim solution. With a TSA, the parent agrees to provide support, in exchange for a fee, until your new organization’s systems and processes are up and running. From your perspective, TSAs may be viewed as expensive, but they are usually a necessary stopgap to allow your company to operate until you can transform to your new stand-alone environment. On the downside, your old parent typically isn’t in the business of selling support services so you’ll probably find that your needs are at the bottom of their priority list. Sooner or later, you’ll need to establish new infrastructure to support your company, either by building them in-house or by outsourcing to an external provider. In either case, the sooner you exit the TSA, the better — you’ll have more control and often lower costs.

Prepare your people.
It’s also important to right-size and right-skill your team. While you may hire someone internally to oversee specialized areas such as Human Resources, Tax or Treasury, consider hiring an external provider that can support smaller foreign locations or episodic bouts of transactional work, rather than staffing up. You’ll also need to think of new ways to motivate the employees who are moving with you. Stock options are no longer a viable option since the company is now private, so you’ll have to be creative in devising alternative incentive plans that work. Motivation will be an important part of your success, as it is likely your entire staff will need to step up their game to effect the stand-up transition while also dealing with the increased visibility and pressure to perform that comes with new ownership.

3. Spin-off as a separate public company (IPO)

It doesn’t happen as often, but sometimes a division goes straight from the protective harbor of the parent company to becoming a publicly traded company in its own right. It’s like leaving home and buying a five-bedroom house right away—you’ll need to develop a wide range of capabilities to negotiate mortgage loans, take care of your own maintenance, and deal with nosy neighbors. But with this added responsibility also comes a great deal of freedom--- if you want to, you can knock out the kitchen wall and paint the dining room fire-engine red.

When your division is spun off into a new public company, the pressure is on to demonstrate your organization’s worth to the investment world—and to showcase your ability to lead a public company. This is one of the most complex types of carve-outs; you will need the infrastructure of a private stand-up as discussed previously—plus the capabilities needed to meet investment community expectations, provide external financial reporting, and comply with Security and Exchange Commission (SEC) and other regulatory requirements. The opportunity provided to a high-level financial executive in a new public company can be great—and so can the risks.

Special considerations for this carve-out: 

Consider your mindset. 
Going from leading a division to running your own public company—what a career leap! If you and your organization meet or exceed Wall Street’s expectations, you can reap substantial rewards. But you’ll also be put under the microscope—not only by your shareholders, but also the media. You’ll need to present yourself and your organization to the world with confidence, skill, and knowledge. You will need to get up to speed fast.

Find your baseline.
In addition to having to do the things described above in the PEI sale, finding your baseline takes on even greater level of importance in the case of an IPO. Since the SEC requires multiyear historical financial statements prior to an IPO, you’ll have additional workload on your hands. Given that parent companies often don’t generate full balance sheets for divisions, you will probably need to develop a methodology to create estimates based on historical information. You’ll also need to work with your auditor to have these reviewed and finalized to support your filings.

Create a transition plan.
With an IPO, you need to develop and communicate (both internally and publicly) a long-term vision supported by a business model that’s sustainable. You’ll need a plan that incorporates the key people, processes, and technology that will allow you to attain the vision. And you need to execute your plan so that your people, processes, and systems are up and running on Day One. Plus, as a public company, you’ll be expected to announce—and hit—short-term targets to uphold shareholder confidence (and your company’s stock price).

Prepare your people. 
Your new company will require a different mix of skills, many which may not exist within your current staff. In addition to needing people who can support corporate finance functions, like Treasury and Tax, you will also need people skilled in investor relations and regulatory compliance. Though your former parent may provide you the option to take a few people in these areas, in most cases, you will need to look outside your organization to fill the roles, either through new hires or relationships with external providers. While you are busy filling these roles, don’t overlook your existing employees. Extensive training and communications must be carefully planned so that Day One goes smoothly. Provide support for any released employees; those staying on will be watching how they are treated as a sign of the new company’s culture.

You can’t go home again. (And why would you want to?) 
It’s not easy to leave the safety net of your parent corporation. Even the simplest carve-out requires deft planning, communication, and execution to capture the value of the deal. At the same time, you must minimize the impact on your customers, suppliers, and employees. The key is to keep your end-state vision in mind as you build the right mix of people, processes, and systems. And when things go well, you are likely to find you enjoy your newly found freedom and opportunities.

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