The road to an Initial Public Offering (IPO) is a long, time-consuming process but, with some careful preparation, there are certain steps companies can take to try and make this journey as smooth as possible.
Joe Notaro, Accounting Advisory Services with Forvis Mazars recently joined John Bagdonas, Business Development, JP Morgan Workplace Solutions to discuss the pertinent topics, including taking a look at the impacts on financial reporting, equity compensation and internal controls for private companies undertaking this goal.
You can listen to the full webinar here.
The main takeaway is that when preparing for an IPO there are two very important rules-of-thumb:
- it’s never too soon to begin looking into the process, and;
- you can never have too much help.
The IPO preparation process
Private companies have been waiting and watching the market for the right moment to properly proceed with their IPO process.
In 2021 there were 416, traditional IPOs raising $155.8 billion, followed by a period of ‘wait and see’. 2024 has seen an uptick in IPOs and IPO-related-activity, largely industry specific in nature, with healthcare and technology flotations accounting for the bulk of the action.
With the US election now in the rearview mirror the general consensus is that there is a pro-business sentiment taking over. Anticipated policy changes are likely to create market conditions favorable to IPOs.
Companies eyeing up an IPO should be aware that it can take 18 to 24 months to complete the process and many of those waiting for opportune market conditions will already be well down the tracks in terms of preparation. Remember, it’s never too soon to begin your preparation.
You will need to determine what route you want your company to take on entering the capital markets, each with different requirements, such as filing necessary documents with the regulatory bodies like the Securities and Exchange Commission (SEC) in the US.
The company should also be clear on why they want to go public. Whether it is to raise additional capital or maybe to expand into new markets, once you make that decision you can build the narrative on why your company is valuable.
An IPO readiness gap assessment is crucial to go through findings, recommendations and action items designed to help educate the C-suite and the board on any gaps in your company. It can serve as a handy ‘go to’ when looking to get buy-in from relevant members of the board.
An IPO readiness gap assessment is when an outside firm that has helped companies go public before will come in and conduct interviews at the C-suite level. It really drills down into the company’s processes, systems and people, looking at areas like accounting and financial reporting, human capital and human resources department, your legal infrastructure, what systems you have in place, your org chart etc. The volume of action items will vary from organization to organization.
Do not underestimate the need to seek out experienced third-party partners who know the requirements and can advise and assist. IPOs comes with a range of complexities involved and you can never have too many specialist on hand to help you navigate the process.
As a private company, you may not have had an external audit requirement. As a public company you will face new SEC requirements and standards for audited financial statements, so selecting the right external auditor is critical.
Getting your first Public Company Accounting Oversight Board (PCAOB) audit out of the way in the year prior to actually going public is generally considered best practice.
You’ll also want to look at engaging a valuation professional. This especially applies to companies who issue stock based compensation or preferred stock, have lease contracts or enter into complex transactions.
Tax expertise is always important and, with the potential for an increased headcount in accounting and finance departments, identifying a Chief Financial Officer (CFO) is essential.
Reviewing systems is a key area of focus of the IPO readiness assessment. As a public company utilizing software solutions will help streamline reporting and other time-consuming tasks. Many startups and early-stage companies handle equity plan administration internally, using spreadsheets or cap table management applications, but that over time this can become impractical, as plans become more complex and financial reporting obligations increasingly scrutinized.
The most typical registration statement for an IPO is Form S-1. Your working group will need to go through all the required sections of the document and assign roles and responsibilities. Legal is going to own a good chunk of the document, such as the risk factors, with accounting teams and technical accounting professionals typically owning the financial statements or other sections that will require financial information, while management and legal will normally work through areas like the business overview and business drivers.
The pre-IPO period can act as a natural opportunity to revisit how equity compensation awards are handled. The overall offering including vesting, exercise and forfeitures should be reviewed to consider what you want your awards to realistically look like when you become a publicly traded company.
It’s of the utmost importance that companies devote sufficient time and resources to their compensation plan arrangements in the pre-IPO period as this type of compensation tends to be handled quite differently in the post-IPO environment.
Your law firm or a compensation consultant firm are great resources to help draw up these plans and to learn the financial and tax pros and cons for the company and your employees.
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