Whether it is for raising capital or increasing market value, there are many reasons why private companies decide to go public. At the same time, most companies do not realize the entire scope of efforts and complexities that are involved in an initial public offering (or IPO). Data released by Economic Times reveals that 100 out of the 164 IPOs launched since 2008 are now trading below their issuing price.
Before going public, companies need to evaluate the requirements and processes involved, as well as the pros and cons of filing for an IPO. The earlier they prepare for the IPO launch, the better will be the outcome. Ideally, the planning and readiness must start around 24 to 36 months prior to the IPO keeping a long-term view. It could take between 12 to 24 months to plan a successful IPO strategy that can save time and costs, as well as mitigate the market uncertainties involved with going public.
How can IPO readiness assessment help in proper planning? And what should be part of any IPO readiness checklist? Let us explore that further.
IPO Pain points and Solutions
An Ernst & Young survey of CEOs (with successful IPOs) highlighted four crucial points for companies planning to go public, namely:
- Preparing efficiently with a sound strategy
- Understanding the entire process
- Having the right team
- Having effective and transparent communication
Companies face numerable pain points when it comes to IPO planning and implementation, including:
- Increasing strain and pressure on existing skill sets and resources
- The need for accurate financial information in order to derive proper valuation of the company
- Existence of a legacy infrastructure that is not tuned for future demands
- The emergence of alternative financing opportunities
How does an effective IPO readiness assessment plan help in addressing these pain points? As a start, CEOs and business leaders need to balance between IPO-related transactions and their daily activities. “Are we prepared?” is among the key questions that CEOs need to answer.
Further, company executives need to assess if their team is ready for the IPO process. Readiness includes evaluating the company’s financial data and identifying and fixing any gaps. The solution is to view an IPO “as more than a single event” and prepare for operating as a publicly listed company.
Next, let us look at what should be a part of any IPO readiness checklist.
IPO Readiness Checklist
- IPO strategy
The first checklist item companies need to determine is whether the IPO path is the right strategy for them. Thanks to the high stakes and many pitfalls, going public is not recommended for every private company. Companies must evaluate the feasibility of the IPO based on the their business model, growth objectives, and life cycle stage. Not only should a company have a proven track record, but solid processes and a clear vision for the future must also be demonstrated to potential investors for a successful close.
A preliminary assessment can help determine IPO prospects based on:
- The company’s historical financial record and their strategic business plan
- Alternative modes of financing like debt financing and venture capitalist funding
- How transparent is the company in preparing for full disclosure?
- Right people
The next point in the IPO readiness checklist is all about hiring the right people. Companies going public need to have a strong infrastructure of the right people, policies, and systems in place before the IPO launch.
This includes a range of IPO readiness people skills including external IPO advisors, underwriters, an experienced board of directors, and a well-rounded senior management team. The management team must prepare to commit a substantial amount of time to the process, and include skill sets such as financial reporting and investor relations in the mix.
- Corporate governance and compliance
IPO readiness is also about corporate governance and internal controls that are much stricter for public companies. Take the case of any successful public company, where it is likely to find the best practices of corporate governance and reporting that can protect the shareholder. For example, all internal controls must be compliant with the Sarbanes-Oxley (or SOX).
The Ernst & Young report found that creating a quality audit committee is among the three leading challenges in corporate governance during the IPO process.
Besides that, make use of IPO advisory services to identify any accounting-related issues or legal disputes that could cripple the IPO process. Further, compliance management should include assessing the existing systems for controlling money laundering, internal audits, and code of control.
- Stock valuation
Determining the right stock valuation (or the IPO price of the company’s stock) is crucial for raising the right amount of capital. Independent experts in stock valuation can help in determining the right price. Before the actual IPO, private companies can perform a stock valuation every quarter.
Additionally, choosing the right stock exchange is part of the IPO readiness assessment. Should it be a:
- A domestic stock exchange that is chosen by 90% of the companies?
- A foreign stock exchange (like Nasdaq or NYSE) that can expand the investor base or increase the stock valuation? Recently, the US stock market has witnessed an unprecedented popularity in companies going public through merging with a special purpose acquisition company (SPAC).
- Financial reporting
A streamlined process in financial reporting is a must on any IPO checklist. As part of the IPO planning, it will be critical to understand and identify the financial statement requirements that would be included in the prospectus. Ensuring that these financials are compliant with public company disclosure requirements and are audited is also a pertinent step.
Additionally, public shareholders are always concerned with the company’s financial numbers or data. Any company going public must have a clear set of operating metrics or Key Performance Indicators (KPI) that can be used to measure its day-to-day performance.
On its part, data analytics can be deployed to extract valuable insights from financial data and benefit in the following ways:
- Improving internal and external audits
- Reducing SOX compliance-related costs
- Improving financial risk management
To be successful as a public company, organizations must approach IPOs as a ‘transformational’ process instead of a single ‘transaction.’ Through this article on IPO readiness assessment, we have identified some of the critical points to be included in your IPO checklist. Having said that, there are far more complexities and challenges that go into an effective IPO planning strategy.
With customer services ranging from finance & accounting to compliance & taxation, Pierian Services have enabled global companies to achieve consistent growth through digital transformation. Our expertise includes high-quality accounting advisory solutions, including IPO readiness assessment for our clients.
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