IPO Readiness
Step-by-Step: How to Prepare Your Company for an IPO | FloQast
An Initial Public Offering (IPO) can unlock significant capital and growth opportunities, but it’s not a walk in the park.
Taking your company public is more like preparing for a marathon; it requires meticulous planning, a strong team, and the endurance to navigate various challenges.
This guide will walk you through the essential steps in preparing for an IPO. We hope to transform what might seem like a daunting process into a series of achievable milestones.
Critical Factors to Evaluate Prior to Taking Your Company Public
Before embarking on the IPO journey, assessing whether your company is ready for the public spotlight is crucial.
A private company may consider going public when its funding requirements exceed its ability to raise additional capital through other means, such as private equity investors and lenders.
However, larger capital requirements don’t necessarily mean a private company is ready to become a public company. Your IPO readiness assessment should consider whether the company is:
- Prepared to meet shareholder and market expectations
- Addressing ongoing compliance and regulatory requirements
- Managing risks with internal financial controls
- Ready to file timely audited financial statements and other reports with the Securities and Exchange Commission (SEC)
Consider whether your company has a compelling growth story that can attract capital markets. Do you have a track record of sustainable revenue? Are you a growth company with a strong management team in place? These are the foundational questions that need affirmative answers before considering an IPO.
Crafting an IPO Strategy
A successful IPO doesn’t start on Wall Street. The IPO process begins 12 to 24 months prior to ringing the opening bell.
Set up the Appropriate Group for the Project Management
Assembling a dedicated IPO project team is the first step in your IPO journey.
The IPO process is a unique and demanding challenge in terms of time and content. The company’s daily operations and development can’t take a backseat during this time, as analysts and investors will scrutinize them closely.
Your IPO team can take on the bulk of pre-IPO work, ensuring your accounting, finance, and operations teams can continue focusing on their everyday responsibilities.
This team should include members from various departments such as finance, legal, HR, and marketing. You can also benefit from an independent IPO advisor who can ensure a holistic approach to the IPO preparation.
Coordinate Stakeholders for IPO Objectives and Timing
Aligning the objectives and timing with key stakeholders, including existing investors, the board of directors, and senior management, is critical. This alignment ensures everyone works towards a common goal and understands the timeline and expectations.
Establishing Optimal Structures and Tax Efficiency
Companies must have a C corporation structure to go public. In a C corporation, the public company pays tax on earnings, and the shareholders pay tax on dividends received from the company and the capital gains generated from selling shares, resulting in double taxation.
If your company is currently structured as a pass-through entity for tax purposes, it typically doesn’t pay tax at the company level. Instead, the company’s profits flow through to the owners, resulting in a single tax layer.
Pass-through entities contemplating an IPO may want to consider an alternative structure that will continue providing investors with tax benefits. These alternative structures are generally only available to companies in specific industries, such as real estate investment trusts and master limited partnerships. However, an umbrella limited partnership corporation (Up-C) can provide tax benefits to pre-IPO shareholders in any industry.
In an Up-C IPO, the public invests in a newly formed company that uses the IPO proceeds to acquire an interest in a flow-through entity from the pre-IPO owners. This structure allows the operating entity to remain a pass-through entity for tax purposes with two ownership groups: the pre-IPO shareholders and a publicly traded corporation.
This allows pre-IPO investors to maintain flow-through tax benefits, ensure liquidity, and retain control. However, there are significant accounting and reporting requirements associated with this structure, so it’s crucial to discuss the decision with your tax advisor, IPO advisor, and legal counsel.
Preparing for Public Offering
Six to 12 months before the IPO, it’s time to start fine-tuning your plans and preparing presentations for prospective investment bankers, underwriters, analysts, and investors.
Enhancing Business Plans, IPO Fact Book, and Presentations for Financial Partners
It’s crucial to present a well-articulated equity story to the marketplace so institutional investors understand the company and its value.
While there’s no one-size-fits-all approach to developing an equity story, it should contain the following six components:
- Addressable market. Show that management is focused on the right growth verticals and channels in the marketplace to build a growth trajectory.
- Growth drivers. How will the company’s competitive advantages lead to industry growth after the IPO?
- Company strategy. Describe the company’s operating model and how it plans to scale operations post-IPO.
- Company strengths. What does the company do well? Which strategies, offerings, and processes differentiate it from competitors and make it an attractive investment?
- Financial projections. Help investors understand the forward multiples and financial ratios at which the company plans to price its IPO. Highlight financial information and key performance indicators (KPIs) demonstrating liquidity, growth, and profitability, such as sales, margins, and customer metrics.
- Deep talent bench. A seasoned team of board members, executives, and directors driving a company through an IPO can help distinguish the company. Your equity story should describe the CFO and other members of the management team’s experience—especially if that experience involves taking another company public.
Curate Your IPO A-Team: Banking, Law, Auditing, Investor Relations, and Advisory Experts
Selecting the right external advisors, including bankers, legal counsel, and other professionals, is crucial. It’s also essential to work with a national accounting firm that can audit your financial statements and is a member of the American Institute of Certified Public Accountants (AICPA). Member firms are familiar with generally accepted accounting principles (GAAP), Financial Accounting Standards Board (FASB) guidelines, and SEC filings.
These partners will guide you through the regulatory landscape, financial structuring, and effective communication with potential investors.
IPO Mapping: Timetables, Due Diligence Launch, and Concept Preparation
Creating a detailed IPO roadmap with timelines for each phase, from due diligence to concept preparation, helps manage the process efficiently. This roadmap should include key milestones, dependencies, and risk management strategies.
Shaping the Equity Story and Valuation Framework with Early Advisor Feedback
Refining your equity story and valuation with feedback from early advisors ensures that your company is positioned attractively to potential investment banks and individual investors. Crafting this story involves understanding market expectations and positioning your company’s unique value proposition.
IPO Transaction
One to six months prior to the IPO is crunch time. If you began your preparations well in advance and have an experienced project management team in place, you’ve positioned yourself for a smooth and efficient execution.
Draft Preparation with Financials, ESG Reporting, and Crucial Contents
Prepare the IPO prospectus, including detailed financials, ESG (Environmental, Social, and Governance) reporting, and other critical information. This document should give investors a transparent and comprehensive view of your company.
Regulatory Compliance: Managing Filings, Finalizing Prospectus, and Securing Approvals
After reviewing the registration statement, the SEC will issue a comment letter asking questions, noting possible deficiencies, and suggesting revisions. Staff generally completes the initial review and issues comments within 30 calendar days of filing the registration statement with the SEC. After that, you can expect several subsequent comment letters from the SEC with follow-up questions, responses, and additional comments on new or amended information.
You must address and resolve each comment in writing before the registration statement becomes effective.
In addition to filing the registration statement with the SEC, you must file in all states where you intend to offer the securities and with FINRA.
Captivating the Right Capital Pools with Strategic Market Timing
Timing is critical in an IPO. Investing during a favorable IPO market environment can increase the chances of a successful outcome.
Key factors to consider when timing your IPO include:
- Market conditions – stock market volatility, investor sentiment, and prevailing interest rates
- Economic outlook – GDP growth, consumer spending, and industry-specific trends
IPO Construction: Order Book Building, Issue Price Determination, and Investor Allocation
The final steps involve building the order book, determining the issue price, and allocating shares to investors. This phase requires a delicate balance between market demand, valuation aspirations, and strategic investor relations.
Post IPO
The IPO isn’t the end of the story. Once the company is listed on a stock exchange, it will face public scrutiny and a range of continuing obligations as a public entity.
Listed companies must keep up with SEC reporting requirements, maintain adequate internal controls and SOX compliance, manage monthly, quarterly, and annual financial reporting, maintain corporate governance, and perform fiduciary duties to shareholders.
Preparing for an IPO and performing as a public company is rigorous but rewarding. Remember, the key to a successful IPO lies in thorough preparation, strategic planning, and the right partnerships. With these elements in place, your company can confidently embark on its public journey.
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