IPO Readiness
IPO 101: Everything You Need To Know About Going Public
After years, if not decades, of hard work, challenges, and growth, going public is an exhilarating moment in a company’s history — one that brings not only financial rewards, but professional and reputational recognition.
But going public is a significant milestone for a reason: the process is time consuming, complex, and inevitably fraught with hazards — not least in the build-up and execution of the initial public offering (IPO).
Navigating an IPO successfully takes careful interdepartmental planning and preparation, but also leans heavily on the capabilities of an organisation’s accountings. So if you’re planning to take your company public at some point, a big part of that decision should be based on the capability and expertise of your finance team.
With that in mind, in this post, we’re going to introduce you to the IPO process, what it involves, and some of the key considerations for CFOs and accountants as they steer their organisations through.
What is an IPO?
An initial public offering is the means by which a privately-owned company transitions to public ownership, by selling its shares publicly for the first time.
Prior to the IPO, the company must create an amount of new shares, set a price for them, and then list them on a stock exchange. The subsequent sale enables the company to raise capital in exchange for relinquishing equity to the new shareholders.
The notion of companies selling shares publicly dates back centuries but the process has obviously changed dramatically over the course of the 20th and 21st centuries. Where shares used to be represented and distributed to shareholders via physical paper certificates, today the process is digitised, allowing for the creation and distribution of fractional share amounts, and for IPOs to take place on a global scale with transactions taking only seconds to complete.
IPO Requirements
Certain regulatory standards and financial requirements apply for companies that want to go public, and conduct an IPO. These include:
- Compliance with the relevant financial regulations. Companies in the EU, for example, must comply with both local jurisdictional financial regulations, and those set out in EU directives.
- Satisfactory financial projections, and a history of growth sufficient to attract public interest and investment.
- Demonstration of strong corporate governance and policy.
- Application of appropriate pre-IPO due diligence, including satisfactory underwriting of the IPO process.
- Compliance with jurisdictional financial reporting and disclosure requirements.
What is the purpose of an IPO?
Going public isn’t an end in itself, and the process offers returns for both the entity entering the public market, and the parties investing in it. Key drivers of an IPO include:
- Raising capital to drive company growth – which may include making future acquisitions, developing new products, or expanding to new territories.
- Improving financial stability by increasing the diversity of the investor-base.
- Gaining access to new capital markets and funding options.
- Increasing a company’s public profile in order to attract new business and talent.
How does an IPO work?
Understanding the IPO process from end-to-end is a foundation for success. With that said, the process involves the following key stages:
Pre-IPO readiness:
- Performing a step-up audit to align with public company audit standards
- Assembling an IPO management team
- Gauging investor interest
- Selecting an investment bank to provide underwriting services
IPO preparation and pricing:
- Conducting due diligence
- Filing a public registration statement with the relevant regulatory body, for example, the US Securities and Exchange Commission (SEC)
- Working with underwriters to value and set the price at which company shares will be offered during the IPO sale
- Marketing the upcoming IPO to potential investors
Executing the IPO:
- Listing and commencement of trading on a stock exchange, for example, the London Stock Exchange (LSE)
- Sale of shares to public investors on the stock exchange
We’ll explore each of those stages in more detail in our next article Breaking Down the IPO Process Step-By-Step.
The pros and cons of going public
The complexity of the IPO process, and subsequent public trading of company shares, mean that companies must consider their position carefully prior, balancing pros and cons, before moving forward.
The advantages of going public:
- Capital access: Funds raised via an IPO can be directed towards company growth, research and development, and acquisitions.
- Public profile: IPO announcements can generate media attention increasing a company’s visibility and boosting brand awareness, with downstream benefits for attracting customers, business partners, and talent.
- Shareholder returns: Investors that supported a company prior to the IPO may be able to generate liquidity through the public trade of shares.
The challenges of going public:
- Time and complexity: Preparing and executing an IPO is a significant time drain for all businesses. The end-to-end process could take years to complete, while the complexity of paperwork and other regulatory obligations can tie up employees and resources.
- Compliance requirements: The IPO process typically increases a company’s regulatory compliance burden, and includes new transparency and reporting requirements.
- Company control: IPOs necessarily dilute the ownership of a company, increasing the potential for shareholders to influence the way a company is run.
The IPO decision-making process
The journey to an IPO is made up of a series of decision points at which you’ll need to review important developments and data, and ask important questions. These include:
- Is the company’s business plan effective? Does the plan demonstrate the value of your company? Does it distinguish the company from competitors? Does it set out post-IPO objectives?
- Does the company have a suitable track record? IPOs are built on strong growth and profitability. The quality of previous financial reports will be critical to supporting decisions about financial history.
- Does the company have an effective IPO team in place? Your IPO process will require a spectrum of skills and expertise, so you’ll need to assemble a team with sufficient experience, including underwriters, advisors, lawyers, accountants, and auditors.
- Are the market conditions right for an IPO? Companies must conduct detailed market analysis in order to gauge the potential performance of the IPO over the short, medium, and long term.
The role of employees and employee participation programs
Employees often have a stake in the IPO process because they hold stock options, offered as part of their compensation. If you have, or plan to implement an employee IPO participation program, you’ll need to educate employees about how the IPO will proceed, and what they need to do to protect their interests.
Important points to communicate include:
- The tax implications of exercising stock options
- How to sell or trade stocks publicly
- How to include stocks as part of financial planning activities
- The rules and regulations associated with exercising stock options and trading stocks
IPO alternatives
An IPO is not the only way to take a company public. Consider these alternatives:
- Direct listing: In a direct listing, a company enters the stock market directly without creating new shares (for an IPO). While direct listing avoids the need for underwriting and creates liquidity for existing shareholders, it means that a company does not raise new capital as it becomes a public entity.
- Dutch auction: While a traditional IPO sees shares priced by underwriters, a Dutch auction enables investors to place bids on shares – with the price ultimately set based on that demand.
- SPAC: Some companies may choose to create a special purpose acquisition company (SPAC) as an alternative to the traditional private company IPO. A SPAC is a shell company that is created specifically to raise capital through an IPO, and then acquire a private company. This approach offers a faster route to public ownership of the private company, but can carry additional risks because there may be uncertainty around the SPAC’s ownership and acquisition strategy.
Prepare for your next chapter with FloQast
Your IPO will be a defining moment in your company’s history, so it’s important you do everything you can to get it right. That means carefully considering both the rewards and the risks of becoming publicly traded, and moving forward with a clear understanding of how to overcome challenges.
You don’t have to make that journey alone. FloQast has helped accounting teams around the world prepare their companies for IPO, with a suite of tools and services to ensure the accuracy of financial reports, the effectiveness of regulatory controls, and the success of pre-IPO audits.
Designed by accountants, for accountants, the FloQast platform provides support for your team every step of the way: if you’re ready to take that first step, so are we.
Find out how FloQast can help your team deliver IPO success: get in touch today.
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