An Interim CFO is a critical team member and the agreement should clearly outline expectations going into the engagement.
An Interim CFO is a critical team member and the agreement should clearly outline expectations going into the engagement.
After a lot of thought, you’ve decided to bring in an interim CFO. Perhaps, your company needs an experienced professional to put your financial house in order. Or, maybe, you are raising your Series C, and a solid interim CFO can help you receive a favorable valuation.
Whatever the reason, you need to sign an agreement with your new interim CFO, but you might be concerned that you aren’t sure what to look out for. Well, no reason to fret because we have got you covered, and we will start our little excursion by asking the most basic of questions…
The purpose of any agreement you and your interim CFO sign is twofold:
Now, before delving into the essentials of a good agreement, let’s flip the question on its head and ask what makes an agreement bad.
Simply, a bad agreement is one that is too short or unclear. If an agreement isn’t specific or doesn’t detail each party’s obligation to the other, it loses its power to act as a reference point for later. In other words, an agreement should not leave anything up to interpretation (at least as much as humanly possible).
So, the first quality of a good agreement is clarity.
With that in mind, let’s see how a contract can better fulfill both of its purposes:
Whether you’re bringing in a temporary professional to help with a strategic transaction, think M&A, or to hold down the fort till a more permanent member joins your team, you need to tell your interim CFO everything you expect them to accomplish during their tenure.
Moreover, you need to include those expectations in the agreement. So, for instance, if you want the interim CFO to help train your current finance team, then that needs to be detailed in your agreement.
If you are to take away anything from this article, let it be this:
The clearer you are on your expectations upfront, the more likely your engagement with an interim CFO will be successful.
That said, you should also be aware that agreements are an excellent place for interim CFOs to highlight their expectations of you. For example, an interim CFO might list out all the necessary resources they need to get the job done. So, the agreement might say something along the lines of the CFO will need access to A, B, and C for the duration of their engagement.
In the same vein, the agreement might state the individuals to whom the interim CFO needs constant access. As a case in point, that same agreement might say, “The success of the interim CFO in performing their services depends on the participation, cooperation, and support of your management.” Simply put, this clause is the CFO’s way of telling you, “I am able to be successful to the degree to which you enable me to do my work.”
Another common clause you might run into is as follows: “You will designate a management-level individual to be responsible for overseeing the CFO’s services. Throughout the course of providing the services, the interim CFO will meet with your representative to discuss the findings and recommendations resulting from the services.” The purpose of this clause is to ensure that the interim CFO isn’t just operating in a vacuum and that they aren’t acting as an independent actor. Instead, they want to always make sure that their actions and work are tethered to where management wants to go.
One of the most important things you should bear in mind is the relationship between you and the interim CFO. In most cases, the interim CFO comes in a consultative capacity. In other words, they might act as a CFO, but they are more of a consultant providing you with recommendations and guidance.
So, how does that little detail impact your working relationship?
For starters, seeing as an interim CFO is not an employee (i.e. they are not the seated CFO of the company), they don’t fall under your directors and officers coverage, or DNO for short. Now, there are ways to get the CFO on the payroll so that they can be included under your DNO coverage, but this has to be outlined in a special agreement.
Another important factor to consider is that an interim CFO does not perform any Attest Functions as an audit firm would. They will not attest to the validity of your financial statements, especially to the outside world.
Over and above, the interim CFO usually cannot act as a signatory on behalf of the company. In other words, they don’t have the power to sign any official documents. Again, this can be accommodated for in special circumstances when needed.
Remember, unless the agreement explicitly states otherwise, the interim CFO is a consultative advisor, one hired for a temporary duration.
Having covered the basics of interim CFO agreements, let’s highlight some important factors that you should keep in mind:
You might choose to include in the agreement how long you want the interim CFO to work with your company.
But, the first thing you need to realize is that when agreeing on the length of the engagement, preliminary estimates are rarely correct. In most cases, the engagement takes longer than initially anticipated.
Why does that happen?
Companies have to deal with different types of financial problems:
Now, when you bring in an interim CFO, you expect them to tackle the obvious problems, ones that everyone else can point out. However, the CFO should also tackle the problems only they can find thanks to their many years of experience.
That being said, when you estimate the length of the engagement, you are basing your estimate on the financial issues that are clear to you. And since you don’t know what you don’t know, your estimates never account for the other types of problems.
As a result, most estimates tend to be too short.
To account for that, you need to be okay with the engagement taking longer than planned, and you would do well to prepare for that scenario ahead of time. For example, you could check the availability of the interim CFO before signing the agreement and see whether they would be able to stay past the estimated length of the engagement if circumstances called for it.
You also need to budget accordingly and have the wherewithal to keep the interim CFO on your management team for a bit longer.
Let’s say that you estimated that you need an interim CFO for three months, but during the engagement, you both realized that you would actually need six months, not three. To make matters worse, the interim CFO has another project lined up with another company right after yours, so they won’t be able to stay for the whole six months. Should you be concerned?
The good news is that if your estimates are off, it’s not the end of the world. Bringing in a new interim CFO to replace the old one is relatively easier than bringing in a new full-time employee. After all, most interim CFOs are professionals who are used to jumping into a new company, getting acclimated quickly, and hitting the ground running.
Moreover, transitioning interim CFOs, i.e. bringing in a new one to replace an old one, is cheaper than transitioning full-time employees. The reason is that interim CFOs come with cheaper onboarding costs: You don’t have to worry about either signing bonuses or training costs.
Nevertheless, transitioning an interim CFO is never ideal because even though the onboarding costs may be lower than normal, they’re still never zero.
In most cases, when you’re bringing in an interim CFO, you’re bringing them in to solve a specific problem. For example, you might need someone to fill the office of the CFO till you find a more permanent hire. Alternatively, you might not need a full-time CFO for the long haul, but you need a full-time CFO right now to help ferry you through some stormy weather. And once the waters settle down a bit, then the role of the CFO can be scaled back along with their hours.
However, thinking of your interim CFO as just a problem solver is a big mistake. Instead, you should think about your interim CFO as an investment, and you want to maximize the return on your investment.
So, one thing you could ask of your interim CFO is to help identify growth opportunities. Again, you don’t know what you don’t know, so the interim CFO might be able to spot opportunities that would have never even crossed your mind.
An excellent example of this comes from one of our CFO veterans, Gary Brooks. At one company Gary worked at, he hired an individual whose sole job was to go through the federal register, identify regulatory changes, and figure out ways the company could benefit from these changes. That employee ended up making the company 10 times their salary every year.
When working with an interim CFO, you will usually be paying them some sort of retainer. With that in mind, there are 5 main types of retainers that you could come across:
Aside from detailing the structure of the retainer, several agreements contain what is known as interest fees, which you have to pay in the event of your being late with your payments. Now, a fair rate in this space would be about 2% per month on the amounts unpaid.
That being said, you should make sure that the interest payments are not exorbitant.
By now, you know the basics of an interim CFO agreement, and you understand some of the things that you need to keep in mind. So, the only thing left for us to do is to go over some of the more important clauses you should scrutinize before signing on the dotted line.
When signing an agreement with an interim CFO, there will be a clause that highlights the main terms of the contract as well as the conditions under which the engagement may be terminated by either party.
To begin with, you should make sure that the agreement gives you the ability to terminate the contract with your interim CFO for any reason.
Another key element to look at is the written notice period required for termination. Some interim CFOs may insist that they need a 30 days’ advance written notice before the termination becomes effective. Other interim executives may be fine with something as short as 7 days’ notice.
So, what should be the right notice period?
Well, there is no right answer here. But the beauty of short notice periods is that they save you from having to endure the fees of an interim CFO for an entire month when you want them gone tomorrow. The counterpoint here is that if the CFO leaves you with a short notice period, you need to move quickly to find an adequate replacement.
As mentioned, the reason you’re bringing in an interim CFO can have a huge impact on your expectations of them. So, if you need an interim CFO to hold the financial house down, your experience will be very different than if you’re bringing them in for a special project, such as an acquisition.
That said, if you were to hire an interim CFO for something like M&A, you could add a clause that incentivizes the CFO to get you a better sale price. Basically, the better of a price the interim CFO is able to get you, the larger of a bonus they receive.
The main criterion here is that the incentive has to be based on an objective and measurable metric. In other words, the gauge by which you judge a CFO’s success, or lack thereof, can’t be something subjective. It has to be tangible to both of you.
Sometimes, you might have extra requirements, and you should lay them out in the agreement.
For instance, you might want the interim CFO to work from your office rather than to work remotely. Then, you should state that in the agreement.
It’s best to provide some flexibility in the agreement if possible. Rather than saying the interim CFO has to be in the office every day, the agreement may allow for some remote work as deemed appropriate by management. The difference here might seem subtle, but it will pay off dividends for your relationship with your new temporary executive.
The agreement between you and your interim CFO is hopefully the beginning of a fruitful relationship. So, you want to make sure to always get things off on the right foot. You need to make sure that the agreement clearly defines expectations and protects both parties. There are a few things you should always bear in mind, such as the estimated length of engagement and the payment structure. Additionally, you should keep an eye out for some critical clauses, including the terms and termination.
All that said, if you still feel like you want to learn more, please do not hesitate to reach out to us. We would love to help you craft the perfect agreement for your next interim CFO engagement.