Private Equity Financial Centralization Best Practices for Strategic Leadership

Megan - 00:00:50: Today, my guest is Steve Mastin, Chief Financial Officer for 4M Building Holdings. Steve joined 4M Building Holdings in the spring of 2024 in the newly created post of Chief Financial Officer. Steve is responsible for overseeing the financial operations of the 4M platform, including consolidated areas such as IT, human resources, risk management, integration, and M&A. Steve brings two decades of experience in various senior leadership roles in finance, accounting, CFO, and CEO roles. He has led financial transformation, spearheaded integration efforts, and driven growth in a broad range of business sectors. Steve is highly regarded for his strategic financial leadership and his ability to optimize business performance while maintaining a strong focus on organizational growth and profitability. Most recently, Steve was the Vice President of Finance for Team Services Group, a sponsor backed provider of self directed home care and household workers nationwide. He holds a bachelor's degree in business administration from Fontbonne University. Steve, thank you very much for being my guest on today's episode of CFO Weekly.

Steve - 00:02:00: Thank you, Megan. It's great to be here.

Megan - 00:02:02: Yeah. Today, we're gonna be talking about the benefits of centralization during periods of growth. And, Steve, I'm looking forward to learning from your experiences with this topic, so let's jump right in.

Steve - 00:02:12: Perfect. Thank you.

Megan - 00:02:13: First, can you start by just giving us a brief overview of your career?

Steve - 00:02:17: Yeah, I've been involved in private equity for probably close to fifteen years of my career in various capacities and I've realized the power of centralization, particularly when it comes to many back office functions throughout it, it just unlocks an enormous amount of value and actually helps the businesses create growth much faster as well.

Megan - 00:02:39: And I'm just curious, why have you gravitated towards private equity? What do you enjoy about that kind of environment?

Steve - 00:02:46: It's a very fast paced environment and there's lots of opportunities to sort of spread your wings and explore different aspects of various businesses. It's a particular niche that I have grown fond of and I've had the pleasure of working with many good private equity sponsors throughout my career.

Megan - 00:03:04: And with your extensive experience across various industries, you've seen businesses at different stages of growth. So what would you say is the most critical factor for scaling a company successfully?

Steve - 00:03:16: The first thing is an apple has to be an apple across the enterprise, meaning what one business unit considers revenue, another business unit has to consider revenue and they have to be coded the same way, similarly with COGS, similarly with OPEX. And so getting businesses in different business units to talk the same language, specifically from an accounting standpoint, is absolutely key.

Megan - 00:03:42: And where does it start? Do you start with like an ERP implementation? I mean, what's step one in the process?

Steve - 00:03:49: Yeah, step one is really aligning the chart of accounts. It's basic accounting 101, getting down into the details and mapping business unit one's GL account number 1234 to sort of the master company GL account number 5678, making that alignment at the chart of accounts level. That unlocks the opportunity really to run comparative statements and then the next thing quickly after that is getting on the same ERP system just so everybody is doing things the same way and then you start getting that history so you can be, you know, sort of properly audited and that really is the first key in unlocking the back office centralization.

Megan - 00:04:29: And in your experience, how does centralization of financial and operational functions help drive growth in the fast paced private equity backed environments?

Steve - 00:04:41: Yeah. Many times, various business units or various subsidiaries, they have a whole financial organization. So they have a head of finance and accounting and then they have a number two person and a number three person and then some people doing basic accounting or running accounts payable or running various reports and making various journal entries. And so they've got four or five people at each organization and almost succinctly when you bring them together, you don't need that same amount of people. So if one organization has 10 people and another organization has 10 people, you don't need 20. You really probably only need 12 or 13, right? For example, you don't need two CFOs, you really just need one CFO, you don't need two VPs of finance, you really only need one and that natural selection just happens most of the time, but that's really the first key in unlocking value creation. The second key really is turning around and saying, hey, now that we've got this, let's all look at the business the same way, let's all look at these drivers and they're getting it from one central source and that information is consistent and it's across all brands or subsidiaries within the organization and that unlocks a lot of value as well because you can learn from your peers. If one business unit is operating at a 30% margin and another business unit is operating at a 40% margin, all else being equal, then you have to go to the business unit that's operating at 40% and say, hey, guys, you guys are doing great. What are you doing differently so that we can apply that same operational rigor across the rest of the organization to raise margin?

Megan - 00:06:19: And today you're at 4M Building Solutions. Can you tell us a little bit about your role there and who they are?

Steve - 00:06:26: I am the Chief Financial Officer of 4M Building Solutions. They're a top level holding company. My role is somewhat multifaceted but I am the head of accounting, finance, IT, legal, human resources, sort of the standard CFO chain of responsibility and it's really to drive integration and to take a strategic view of the business. Those are the two tenants really that I was brought in to manage and to execute on and the strategic part of the business is always very interesting and so I've had an enjoyable time so far.

Megan - 00:07:00: And I'm just curious, in the past few years have you seen the role of CFO evolve? It seems like it is taking on more and more responsibility, so I'm just curious to know how in your opinion the role has evolved.

Steve - 00:07:15: Yeah, the days of a CFO being strictly focused on issuing the financial statements are long gone. The CFO is much more a strategic driver of the business and a strategic leader of the business, really involved in all facets. Technology has done a great job of being able to produce financial statements and many times the financial statements can be almost a lagging indicator or a historical view of what the business has done and so the CFO and the office of the CFO has had to shift into what are some of the more leading indicators? Where can you understand where the business is going to go? What's around the bend? Or many times, what should be around the bend? How do we grow organically? And then of course, in the private equity world, it's also how do we grow inorganically and what's appealing and what new markets do we want to enter in or how do we think about a particular acquisition? So it's very far afield from the days where it was probably ten years ago, certainly twenty years ago of here are the financial statements, here's our liquidity perspective and here's our leverage ratio. Those are still important and they're an important part of the job, but they are increasingly becoming not a secondary, but a less impactful part because that information can be garnered in so many different ways through technology.

Megan - 00:08:36: And what are some of the main benefits and challenges of centralizing financial operations across multiple geographies or business units, especially in companies like 4M Building Solutions?

Steve - 00:08:48: The limiting factors, really two, right? So the first limiting factor is adoption, particularly in a private equity space. Many of the businesses that PortCo, which is a sort of a holding company, will partner with are small businesses. The owner or the general manager of that small business is used to seeing things done a particular way and used to being able to go over and hand somebody a bill and say, Hey, please pay this bill or please do this or I want this recorded a little bit differently. And in the private equity world, when you get acquired, that's not the case anymore, right? So to that, we relieve the general manager of that burden, right? No longer do they have to worry about paying the bills and no longer do they have to worry about coding the bills or the expenses or revenue. But the other side to that coin is they lose that control of being the keeper of the purse and they lose the control of getting the information just the way that they want it and they've ran it. So adoption is the first one and the second one is, of course, people, right? You have to get things done through people and people have to buy into the vision and many times they do. Many times they're excited. Merging businesses or being acquired creates an enormous amount of opportunity, both on the acquirer and the acquiree side, but change is hard and not everybody can adapt to that change and not everybody can adapt to that change at the pace that private equity backed business requires.

Megan - 00:10:11: So for those that are not excited about the change, how do you deal with them?

Steve - 00:10:16: It's really having the direct yet heartfelt thoughtful discussion with them about, hey, this is the direction that the business is going now. You've made an important contribution prior to the sale, prior to whatever event has happened, but if you're not willing to get on board and this is not for you, that's okay. Let's figure out something that's interesting for you. Let's figure out an off ramp for you if you're not willing to do that or you can't do that. And if you are, that's fantastic. Let's get on board. Here's what's expected of you. And if you're not, then you create a thoughtful off ramp for them, but they need to move on.

Megan - 00:10:51: And at what stage of a company's growth do you think that centralization should occur, and what factors do you consider when deciding to centralize certain processes?

Steve - 00:11:01: I'm a believer that centralization should occur almost as early as possible. So in the private equity world, really taking the view of an apple an apple and getting everybody talking the same language and centralizing all these processes is almost from the get go and knowing that that's part of your investment thesis if you're a sponsor is really key because what happens is the longer you delay it, you create this inertia that happens where it's like, oh, I'll just continue to do it and I'll continue to do it and there's one or two people behind the scenes that are trying to knit everything together and it just becomes more and more complex. It's almost like an untreated cancer. It does not get better with time. So the sooner you can do it in the PortCo's life cycle, the better you will be and you just apply that same rigor all across the board and you're transparent about it from an acquisition standpoint. You say, hey, we don't need two CFOs and we don't need two vice presidents of finance or I'm glad that person A has worked with you for twenty years and they've been your bookkeeper for twenty years, but we don't need that person anymore and that's part of our magic sauce and sometimes we can find a home for that person and sometimes we can't.

Megan - 00:12:12: And when you are centralizing processes and systems, how do you ensure that things continue to be flexible enough to accommodate various departments or regions as the company scale?

Steve - 00:12:24: You have to design your systems and you have to design your processes in such a way that they are repeatable and that they are expandable such that the old database design that I learned in college, right, numbers shouldn't be smart, right? You shouldn't confine yourself if you're looking at a geography to say, Oh, well, everything in the Midwest has to begin with a number two and everything in the Southeast has to begin with a number four. You can't take such a myopic view on designing your system that way. And then flexibility is really key and the key to flexibility and being able to look at things in a different way and look at things in a different light is really data, right? And so it's tagging transactions and coding transactions in such a way that it contains a sufficient amount of data, a sufficient amount of information where you can dump it into an Excel pivot table or you can look at it through Power BI and slice and dice it in a number of different ways to gain thoughtful insights and those thoughtful insights can say, Hey, we need to be flexible over here because we need to go into a new market and look at all these outlying customers that we have within this geographic region. Right? So the transactions have to be coded in such a way where you can sort of say, Hey, give me everybody X miles away from the city center of this city or that city center. And it's possible to do that. You just have to have the forethought to design systems that way.

Megan - 00:13:47: And I'm just curious, but working in a private equity environment, like, what percentage of your time is spent doing kind of detail oriented tactical stuff versus strategy?

Steve - 00:14:01: I would say it depends on the time of the year and it depends on what's going on with the business. So this we're recording this in February and this is what the accountants refer to as busy season, which is compounded with the annual budget, the annual audits, you know, you get your financial statement audit, you've got 401k audits, everybody wants to come knocking on your door and take a look at your books. So, this is generally busy season, certainly a little bit more attention to detail during the first, I would say, three to four months of the year. But beyond that, I would say in a broader scale, I would say 50% of the time. Maybe 50% of the time is spent on strategy with the other 50% of the time spent on sort of the real detail and trying to gain insights into the work.

Megan - 00:14:46: And in your role at 4M Building Solutions, what strategies have you employed to standardize financial reporting, data management, and compliance across diverse and growing workforces?

Steve - 00:14:58: It started as I suggested, right? It's getting everybody operating on the same ERP system and then it's getting everybody, all the we call them team members all the team members working on the same payroll system, doing things the same way, right? That unlocks the power of having human resources roll out policies equally to all of our team members across the organization. Accounting is centralized under one set of controls. And we've got people all over the country that are working within the accounting department, but there's one person that's in charge or two people that are in charge of making sure that the books are closed and it's the same thing with human resources. From a compliance standpoint, it's applying the same level of vigor with regard to our standards for safety, with regard to our standards for, you know, whether it's health insurance or anything like that. And to get place to start, I've been very successful in starting with accounting and then that naturally those functions then naturally progress on down the line.

Megan - 00:15:54: And what role does culture play in centralization? Are you trying to standardize a culture or how does culture play into it?

Steve - 00:16:02: It's interesting you bring that up. Culture is probably the number one factor and it's something that when you're targeting an acquisition, certainly as a platform company, you have to evaluate the other business' culture and sometimes it's a fantastic culture and sometimes it's not, but it's understanding what you're walking into. Many small business owners keep their books very, very close to the vest and don't share that information with employees and I've always found it best to share just about everything that you can with employees because they want to contribute to success and everybody likes to win, right? So if you're winning, shout it from the rooftops. And then if you're losing, like, here's the areas that we need to correct on and people can take that criticism. But culture is probably the number one factor with regard to a successful acquisition and successful centralization. All of our work gets done with and through people and so having the right people on board and making sure that they have the right mindset and ultimately that they're happy is key to success.

Megan - 00:17:01: And in the context of scaling and centralizing operations, how do you balance the need for strong centralized control with the autonomy of regional or departmental teams?

Steve - 00:17:12: You see, you really have to draw a line. In that line, as you work your way up the chain from an organizational responsibility standpoint, your peers are just that, they're your peers, right? And so it's letting the operators or letting the people on the ground do what is best and make decisions for the business that they feel is right. There is an old analogy I learned from a boss of mine and it was a tree leaf branch sort of analogy, right? And if you break a twig on a tree, that's okay, you just learn from that mistake and certain frontline employees are empowered to make it right whether they have a $200 threshold or a thousand dollar threshold. But if they break a little branch on a tree, it's not really gonna hurt the tree. And then as you work up management, here's a really big trunk of the tree. Okay, well, the frontline employee can't make a decision that is going to be that impactful and as you sort of work your way down the tree, the tree analogy, really when you sort of get to the roots of the tree, right, those are decisions that are made really at the C-suite level and of course at the board of directors level because if you don't have good roots, the tree will die. The analogy here, of course, is the tree that the company is. Those decisions should lie with the C-suite and then with the board. And so it's about empowering employees as much as possible all the way on the front lines, right? As any customer service business, do you make them happy on the first phone call? And sometimes you can and sometimes you can't, but you should try our best to make people happy and we should also try our best to empower people. Hire good people, I believe that people show up to work every day wanting to do a good job. They generally do. There's a handful of people that show up to work every day that don't want to, but most people do. And so give them the tools to do the very, very best that they could do, and the results will be amazing.

Megan - 00:19:00: And how does centralization contribute to cost control and resource optimization during periods of expansion? You mentioned, I mean, you can't just double the workforce because your business is doubled.

Steve - 00:19:12: So centralization is great because it allows people to specialize in areas that they feel most passionate about. Right? Maybe somebody really enjoys working with fixed assets and coding fixed assets and they want to go deep on that and you happen to have a fixed asset heavy business. Well, they're going to thrive in an environment of growth and saying, Hey, this is my wheelhouse. I love fixed assets. I love property tax and all these different things. And that's great and they won't necessarily have that opportunity at a smaller organization. And it's the same way you can apply that same thought to a junior accountant or a staff accountant and sort of work your way up the chain. And it allows people to go deep into an area that they feel passionate about. The converse to that is it also allows people to go wide and say, Hey, I've really never had exposure to accounts payable or I've really never had exposure to HR benefits law and what that all entails and how to make sure the health plan is HIPAA compliant and meeting all the legal requirements. So I'm going to go learn that in this part of the business or I'm going to go help the person that's in charge of that. So it really creates a vast amount of opportunity. But I go back to the point where if you're processing five bills as an accounts payable clerk and somebody hands you two more, you can do two more. It doesn't take that much time and so again, it's not a one plus one, so it automatically creates scalability.

Megan - 00:20:33: And as you guide 4M Building Solutions through its growth trajectory, what role does data centralization play in forecasting, risk management, and aligning financial strategies with overall business goals?

Steve - 00:20:46: It's an interesting question. Data is super powerful and with any organization, certainly one that's as old as 4M's, it's been around more than forty years, almost fifty years, but even for the newer de novo organization, it's absolutely key. You know, the old computer adage of garbage in, garbage out, it's really focusing on making sure the data aligns, making sure that it's properly coded and then it's implementing a system to take those individual codes, group them in such a way to where the insights that you can garner from that data are readily available. So 2025 is going to be a big push for us for data and centralization and it's something that we are embracing as a company. We know that we're very, very good in quite a lot of ways and the data is going to show that and interestingly enough, we know that we've got room for improvement in areas and the data is going to show that too and that's where we can focus on.

Megan - 00:21:42: And last question, but I'm just curious, how do you see new technologies such as AI helping the role of CFO evolve?

Steve - 00:21:51: Admittedly, I have been a late adopter to AI. I'm looking at it through a very, very skeptical lens, but what I have seen is that it can be immensely powerful, right? The ability to ask a question in just plain English and say, what's my sales in Atlanta, Georgia? Right? The ability to pop that into a chat and then have that information displayed, that is certainly very, very powerful and something that is appealing. On the other side of the coin, when you talk about quoting and some of the other processes, it's actually an area of personal growth that I just wanna understand it better and understand how to train the system to work for me. The other thing that scares me a bit is data is proprietary. Right? So, our financials and our customers and all of our internal stuff is highly confidential. And so there's a fear that I have about loading that into an AI model and then all of a sudden now that's available to the world. So I've got some apprehension around security, skeptical about how it would actually do the job and replace it. I know that it's coming. Some of the powerful tools that I've seen are really appealing, but I have not been an early adopter.

Megan - 00:23:03: I don't think you're alone there. But, Steve, thank you so much for being my guest today.

Steve - 00:23:08: That's wonderful. Thank you so much for having me, Megan.

Megan - 00:23:10: Yeah. I really enjoyed speaking with you, and thank you so much for finding the time to be here with us today to share your experience and knowledge, and I wish you all the best.

Steve - 00:23:19: Thank you so much. I wish you the best as well.