Once you are ready to bring on a Fractional CFO, you need to consider the content and purpose of having an agreement in place.
Once you are ready to bring on a Fractional CFO, you need to consider the content and purpose of having an agreement in place.
Congratulations!
You have found a fractional CFO you want to work with—or, at least, you are close to finding one—and you are currently trying to figure out what should be included in the service agreement between the two of you.
No matter the case, we have got you covered. What follows are all the key points you want to include in an agreement.
Before signing any service agreement with your new fractional CFO, you need to start with the right mindset.
You need to:
Let’s explore each one of those individually.
When bringing on a fractional CFO, most company owners and CEOs are in one of two camps:
If you know what you need the fractional CFO to do, write it all down. You might have already done so when creating the job description for the role.
But, if you haven’t done so, now is the time.
And be thorough.
For instance, if you want the financial executive to help you close your books while also training your finance team, you need to have everything jotted down to be included in the agreement.
Alternatively, you might have a clear project in mind for which you are seeking fractional help, such as a merger or acquisition. Then, you need to be clear on how you want the fractional CFO to help and what level of involvement you expect of them. However, it is okay to have blanks here as the CFO is the expert that will help show you the breadth of the project.
If you are unclear about what needs to be done, that is okay.
Gary Brooks, a veteran CFO and ex-CFO of the Houston Astros, says that it is normal for CEOs to hear from other professionals, e.g. their bankers or accountants, that there is a problem with their company’s finances. However, without the right level of expertise available, it can be difficult to understand the source of said problem or how to deal with it.
Accordingly, when you don’t know what the problem is, you need to let the fractional CFO come in and perform their own discovery process to help you find out where the problems are coming from and how to deal with them.
As a case in point, whenever Gary would engage with a company, his first act was to ask for numerous documents, including their current financials, a description of their banking relationships, and details of any significant contingent liabilities.
And what he usually found was that most companies’ problems would fall into one of three buckets:
As mentioned, most CFOs will perform their own discovery process to help weed out any financial problems plaguing your company.
In turn, you need to give them plenty of leeway to do so.
After all, these are professionals who have seen countless problems at multiple companies, and you don’t know what you don’t know.
As a result, trying to control the fractional CFO too much or placing too many restrictions on them could backfire.
For instance, you might want to set KPIs to help manage them, but that might be difficult, especially when you are still starting out and there is still plenty of ambiguity regarding the work that needs to be done.
However, once the work that needs to be done is clear, setting those metrics and benchmarks becomes much easier.
It is important to remember that the fractional CFO is a consultant helping you grow your company and that you still need to run the show. This means:
With those elements in mind, you are ready to get to the agreement.
Any agreement you sign with your fractional CFO will have two purposes:
Here’s how each one of those plays out:
Having clarified your expectations earlier, you should place them all in the agreement. So, if you know the work you want done, specify that in the agreement. Alternatively, if you aren’t so sure, then focus on the discovery work that will happen in the beginning and discuss how the results of the discovery will be put into action later on.
Also, if you have any budgetary constraints or concerns, highlight those at the outset.
Moreover, include any other conditions you deem necessary. For instance, if you want the CFO to work on-site and are uncomfortable with a remote arrangement, include that in the contract.
However, your fractional CFO will also use this opportunity to clarify their expectations of you. For instance, if they need access to specific resources or employees, they might mention this in the agreement, highlighting that the quality of their work will be impacted by how much access they have to said resources.
Moreover, as we said earlier, the fractional CFO will likely insist that you designate someone to oversee their services. The reason is that the CFO needs to share their findings and discuss possible future actions routinely with someone familiar with the work being done. Also, this person will act as or assign a point person to make sure the CFO receives all of the documents and systems access they need.
We mentioned earlier that part of clarifying your expectations is highlighting your budgetary limitations.
For instance, while the cost of a fractional CFO depends on the number of hours you need them to work, you will usually pay something in the range of $5,000-$12,000 a month.
However, it might very well be that you can only afford $8,000 a month and not a penny more. In that case, the agreement needs to explicitly state this to protect you from cost runoff.
On the other hand, you also need to remember that your fractional CFO is an outside advisor and not an employee. This distinction has a few ramifications:
A lot of these elements might be included in the agreement.
Having discussed the main objectives of a contract, we can now explore some of the main terms and elements you will likely find in any agreement.
In the pursuit of protecting both parties and highlighting expectations, here are the main sections you might want to pay extra attention to:
Let’s take a closer look at each section.
Every fractional CFO relationship may be terminated at some point for a myriad of reasons, including bringing on a full-time CFO, going through financial hardships, or ending the project for which the fractional hire was brought on in the first place.
Whatever the reason may be, you want to go over the termination section and understand how either party could dissolve the relationship.
This section will also discuss the length of the required notice period. Some agreements may not require a notice period, i.e. the arrangement could be ended on the spot. Conversely, other agreements specify a notice period of up to 30 days.
Now, while there is no ideal length for the notice period, you should be aware of the pros and cons of short and long periods.
A short notice period gives you the power to end the relationship abruptly. The pro here is that if there is a sense of urgency behind your decision, you don’t have to remain stuck paying the fractional CFO their salary.
However, the con with short notice periods is that the fractional CFO may not have sufficient time to hand over important projects or document knowledge they need to share with you.
Depending on the negotiations before the agreement, you will have arrived at a price with your fractional CFO.
Fractional CFOs charge by the hour, and their hourly rate ranges somewhere between $175/ hour and $350/ hour. So, if you agree that the CFO will be working 8 hours per week, you know you will be paying something between $5,000 - $12,000.
However, before you start working with a fractional CFO, they will ask for a retainer more often than not. Usually, this retainer, which might be in the ballpark of $10,000, will be deducted from the final invoice, assuming there are no outstanding expenses.
Additionally, some fractional CFOs will insist on charging interest fees if you are late in settling their invoices. A decent rate is around 2% per month.
The agreement will probably contain extra fees to cover the following:
Remember, a big purpose of the agreement is to protect you and your organization.
So, think of every other source of liability and concern so that you can have it covered in the agreement.
For instance, if your company operates on the cutting edge of technology, and intellectual property is a significant concern, you want to include a term highlighting your insistence that the fractional CFO avoids any projects that might cause a conflict of interest.
Simply, you should adapt the agreement to your company’s unique needs.
Many CEOs hire a fractional CFO after their company has grown to the point where a financial leader is needed to restore order and offer a much-needed strategic lens.
Nevertheless, there is also plenty of ambiguity and murkiness, especially during the beginning of the engagement. So, CEOs would be best served to approach a fractional CFO services agreement with a flexible mentality, one that is curious.
The flipside here is that bringing in an expert is not a reason to abdicate responsibility. While the fractional CFO will offer you their professional advice and do everything they can to help you succeed, it is still your responsibility to make all the final decisions and to always keep your eyes on the budget.
All this being said, if you are about to engage with a fractional CFO and would like some help with your services agreement, please do not hesitate to reach out. We would love to help you craft an agreement tailored to your unique situation and protects your company.
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