CFO & Co. is a Corporate Financial Management (CFM) firm, a new concept in accounting outsourcing. Staffed top to bottom like a major league accounting and finance department with CFOs, controllers, and the rest of the accounting types and tasks.
Let’s look at a recent Task we handled
Background. A real estate developer bought a valuable piece of property in a hot area and brought in a joint venture partner to assist with capital. The developer became the General Partner (GP) and the capital partner the Limited Partner (LP).
The JV gave the GP and LP a preferred return on their capital investments and thereafter they split profits 90% LP / 10% GP. As an incentive to the GP to maximize profits from the project, the JV provided a waterfall (a bonus arrangement) split of profits on a graduated scale (the more the profit, the more the GP’s split of the profit increased). Legal papers were drafted but the partners were struggling to agree on the definitions of financial terms and formulas for determining the waterfall split of profits. The GP asked CFO & Co. to assist in clarifying such terminology and formulas.
An ounce of prevention is worth a pound of cure. Well-informed and intentioned attorneys often put financial terms and formulas in their agreements, but as in this case, sometimes their terminology and formulas don’t provide the accountants the clear road map needed to later execute such calculations. Misinterpretations between parties happen as a result. Such misinterpretations can be easily avoided by putting the “accounting” specificity into the document.
Our remedy. After gaining an understanding of the deal from conversations with our client and reference to the financial model of the deal, and then reading the documents, we sussed out the true workings of the waterfall calculation. Working with the legal team, we defined the terms and described the calculations in a way that was both clear and concise. Both parties were satisfied.
For their investment of a couple hours this task took us to complete, the client clarified the crux of the financial terms of their agreement and avoided potentially disastrous confusion down the road. A simple task like this is one of the ways clients gain an advantage by using us as their CFM firm.