Are you IPO Ready? Navigating the IPO Roadmap Successfully
May 12, 2021 | By John Siegel
An initial public offering, or IPO, is the holy grail for many startups. For accountants, that first journey through the IPO process is memorable. The long hours, intense demands, and crushing deadlines set a new bar for what you may have believed you were capable of. But that journey to IPO, as arduous as it is, can be made easier if you spend time beforehand getting IPO ready.
What Is IPO Readiness and Its Importance?
IPO readiness means that your company has the governance, financial reporting, and internal processes in place to meet the regulatory requirements to sell shares of their stock to the public. After a company goes public, and throughout the IPO process, that company’s internal workings and financial information are carefully scrutinized by investors, analysts, and the media. In addition, there’s a boatload of additional reporting and regulatory requirements that newly public companies will be complying with as long as the company exists.
Besides providing companies with an infusion of cash to finance growth, IPOs are vital to our economy as a whole. They inject new ideas and investment opportunities into our capital markets.
Now I did a lot of sports growing up, so I would never take on an important game without advanced preparation. Likewise, being IPO ready means you have the right elements in place, and like an elite athlete training for the Olympics, you’ve put in the time and effort to make the most of your opportunity. For most athletes, there’s usually another game or race after the big one today.
However, with an IPO, you only have one shot. So there’s a lot riding on this one event. Plus, if you miss reporting deadlines or your forecasting misses the mark after you go public, the market may punish you beyond recovery. That’s what happened to Blue Apron.
Key Elements of IPO Readiness
With so much riding on a successful IPO, and on a successful transition to a public company, it pays to get your house in order at least a year before the planned IPO. Let’s look at four areas that pose the biggest challenges for companies in their journey to IPO.
Reporting and Disclosures
Private companies can keep their financial information private. Not so with public companies. To comply with regulatory requirements from the SEC, public companies have to report and disclose a wide menu of financial, operational, compensation, and strategic information to investors. Their financial statements need to follow GAAP and SEC rules, and there are stringent quarterly reporting deadlines in addition to year-end reporting.
Those financials need an independent audit, so if you’re not already getting an annual audit to keep your bank and other stakeholders happy, you should start now. Like the other advisors you’ll be adding to your team, consider seeking out an auditor with public accounting experience.
Finance and Accounting
Besides getting into a cadence of monthly and quarterly financial reporting, you’ll need additional resources beyond the usual back-office operations to meet the expectations of investor relations and stakeholders. They’ll be carefully scrutinizing budgeting and forecasting information, and comparing that to actual numbers. They’ll be poring over your risk management strategy.
A bare-bones accounting team will struggle desperately to keep up with reporting while also complying with accounting standards, so you’ll need to build out a bigger accounting team. Seek out new hires with technical accounting skills and preferably prior experience with public companies. Your month-end close needs to be not just fast, but right the first time, so you’ll need an efficient and reliable closing process.
Your systems and processes will need an upgrade to operate as a public company. Relying on manual processes and Excel won’t cut it anymore. Your team will need to leverage technology and automation to ease the reporting burden. At the very least, you’ll need a cloud-based ERP instead of QuickBooks Online.
Another significant hurdle in IPO readiness is compliance with Sarbanes-Oxley. This 2002 legislation requires public companies to demonstrate that their internal controls are working. It’s best to start early with SOX -- waiting until you’re drafting the registration statement will put too much of a burden on staff.
The cost of SOX compliance isn’t cheap: a 2020 survey by Protiviti put the average cost for organizations with just one location at $828,200. The biggest companies paid over $1.7 million. That survey, by the way, has a great list of tech solutions to simplify and automate SOX compliance in the COVID era.
Governance and Leadership
To protect the interests of investors, public companies are subject to multiple layers of corporate governance. First, they need an experienced management team, preferably with at least a few members with public company experience. A bonus is hiring a CFO who has been through an IPO at least once. At this level, CFOs aren’t just scorekeepers -- they “put points on the board.”
The executive team is subject to oversight by a board, so start building out that group at least 18 to 24 months pre-IPO. The SEC and the various stock exchanges have rules for board governance, so be sure to understand the precise rules that will be relevant. A given is that a majority of board members will need to be independent. You will also need an audit committee and a compensation committee.
This is just a sample of what an IPO readiness assessment entails. PwC has a more detailed list in their Roadmap for an IPO.
What Are the Stages of an IPO?
At a very high level, the roadmap to IPO can be broken down into four stages:
Starting 12-24 months prior to IPO, your company needs to complete an IPO readiness assessment and begin developing the accounting, finance, and governance structures you’ll need. You’ll also choose your auditors and legal counsel and start the cadence of regular reporting, forecasting, and budgeting.
Six to 12 months prior to IPO, you’ll select your investment bank, and work with them to start due diligence. You’ll develop your equity story to create a compelling vision of why investors should buy your stock. You will also develop presentation materials for banks, investors and advisors.
In the last six months before the IPO, you’ll draft your registration statement, or S-1, which will include the prospectus that investors will study to glean information about the company, its track record, and strategies for the future. This is also when the investor roadshow happens, and you begin your initial 10-Q filings. You will also finalize approvals from the SEC, the stock exchange and work on pricing. Your investment bank and your company will work out the initial pricing. Member firms at your selected stock exchange may also offer recommendations about stock valuation.
Here is where the real work of being a public company begins. It’s not enough to have a great lead up to an IPO -- you’ve also got to deliver on the promises in your prospectus, which means crystal-clear reporting and disclosures, and consistent, reliable corporate governance.
How Do I Prepare for an IPO?
Start early. At least a year before the anticipated IPO date, start the planning process so you can get all the pieces in place exactly when needed.
Get the right team on board early. You’ll need a strong management team with at least a few members who have been through an IPO already. Prospective investors base a large part of their decision to invest on the quality of management.
Secure your financial foundation. Ideally, your company should start acting like a public company at least 12 months before you plan to go public. That means, doing a hard close every month and producing your 10-Ks or 10-Qs timely, and even doing mock earnings calls to practice. To get the most out of an IPO, your company needs to be outperforming the competition on key benchmarks. The performance of your company, along with the company’s strategy, brand strength, and governance structure are elements of a compelling equity story.
Getting through the IPO process is a remarkable achievement. Although you can’t control what the market ultimately decides about your company and its stock, being IPO ready will let your company make the most of this one singular event. So go out and play to win!