Because it provides a tremendous opportunity for growth, the idea of executing an IPO is thrilling for many private companies. Despite the excitement, it is important to first consider whether the entity is ready for the rigorous process of going public.
Here are key factors to consider before commencing an IPO process:1. A Clear View of the Business/Segment Being Put Up for IPO
Above all other considerations, it is ideal for management to first consider if the company is well placed to undertake an IPO. What do the financials look like? Are the historical records accurate? Whether it is the entire company or just a division (i.e., a carve out) of a business that management intends to IPO, getting an in-depth knowledge of the business model is fundamental for determining its readiness to operate as a public company. This can include:
- Market positioning – When going public, will the company be in a competitive position to gain a foothold in the market?
- Forecasted results – Does the company have enough data to reliably project their future performance and other markers (e.g., EBITDA, cashflow) for the first year as a publicly traded company?
- Corporate governance – This is an area that can be easily overlooked. The various stock exchanges have rules on a listed company’s board structure and governance practices. Depending on the type of public company, there are many aspects of a board composition that must be considered, such as the size, share structure, and even the diversity and gender ratio.
2. The Control Environment
A company that wishes to IPO should evaluate the robustness of its control environment. While exemptions from SOX compliance exist for companies that meet the Emerging Growth Company definition, all public companies are required to assess and document the effectiveness of their processes for producing their financial records. If not already compliant, the process of ensuring the company will meet SOX standards can take at least a year. Management should consider if their existing entity-level controls address the “what-can-go-wrongs” in the business by assessing the following:
- Their external and internal risks;
- Risks that impact the accuracy of reporting of financial statements; and
- The extent of exposure to fraud.
Other factors management can consider include the precision of implemented controls, reliability of IT controls (for automated controls), and the risk of human error (for manual controls). Ensuring they address the key risks of material misstatement and are sufficiently documented can help to enable a smoother IPO process.
3. Systems Operational Readiness
Because they are more cost effective and appropriate for smaller sized operations, it is not uncommon for businesses operating as a private company to employ entry-level systems to manage the financial reporting process. However, a company contemplating IPO is likely to find that transactions are more voluminous and complex. Additionally, a newly public company will also have to contend with other reporting requirements not otherwise required for those that are private. In most of these occurrences, the entry-level systems are insufficient to meet the needs of the company. They may consider implementing more robust solutions, such as an HCM system for Human Resources processes, a more powerful financial system to streamline month-end close activities and balance sheet reconciliations, and other financial reporting tools to facilitate reporting to shareholders, auditors, and the SEC.
The implementation of appropriate systems in the lead up to an IPO, when combined with an effective control environment, can contribute to accuracy in financial reporting and provide management with more efficient operations and better forecasting capabilities for financial planning.
4. Establishing a Project Management Office (PMO)
Ensuring that the current day-to-day operations are business as usual takes an entire workforce, but to do that while also preparing for an IPO with the same amount of staff will undoubtedly be a monumental task. While not impossible, it is logical to assume that the more the plate is piled, the more likely employees are to become less meticulous in record keeping and accounting as they try to manage their workload, subsequently detracting from the goal of IPO readiness. Companies should also consider the need for a separate team to focus solely on the preparation for going public, whether internally or involving external consultants to direct the process and engage the SEC.
There are many things to consider before going down the path to be a listed company. However, to avoid excessive legal and accounting costs, get everything organized by: emulating a public company before going public; addressing all control, accounting, and technical issues; and by considering the need to put in place a specialized team to successfully guide the process, the path becomes shorter and easier to navigate.