Market Volatility: Is Your IPO Ready to Go?

Chris Wright, Managing Director Public Company Transformation Practice Leader

January 2018 set a record for initial public offerings (IPOs), with 17 companies raising almost $8 billion, surpassing the record of January 2014, when 12 IPOs raised $5.3 billion. That pace slowed considerably in February, however, amid substantial market volatility.

It is easy to understand why companies – or their underwriters – grew shy of IPOs amidst the market swings. IPO activity typically accelerates in a rising market when investor demand is high, and slows in a falling market when investors tend to be skittish. There is an art to timing a stock launch, aiming for when windows of opportunity are open. In an up-and-down market, it pays to be prepared.

Public company readiness is an endeavor requiring significant time and effort, and attention across the organization. As such, it is not something that should be stopped and started according to market fluctuations. More important, “readiness” implies focus not only on going public but, for those who have already made the jump, focus on maintaining sound financial reporting, corporate governance and other public company obligations, such as Sarbanes-Oxley Act (SOX) compliance reporting and the adoption of new accounting standards for revenue recognition and leasing.

Protiviti’s Guide to Public Company Transformation: Frequently Asked Questions is a great resource for this journey. Here, I remind our readers again some of the things IPO-bound companies should consider right now.

Prepare a Project Plan

The typical IPO readiness plan can take anywhere from 12 to 18 months to implement. There are internal controls that must be considered, legal and audit considerations, and even disclosures about non-financial reporting matters such as cybersecurity. These are key steps that need to be coordinated and properly timed. In many cases, organizations may need to hire new senior executives with public company management experience to guide the process. These are not actions that can be taken at the last minute, or put on hold while the market warms up.

A good project plan begins with a baseline of the current state of the company and serves as a road map for getting the company from where it is to where it should be for a successful transition to public company status. Baselining begins with a diagnostic process that accomplishes the following:

  • Assesses the current state of readiness against policies, processes, people, reporting, methodologies, and systems and data benchmarks
  • Identifies the readiness for core public company requirements such as reliable financial reporting, efficient financial close, corporate governance and SOX compliance, and IT scalability
  • Assesses the urgency of solutions needed to close identified gaps based on an analysis of costs and benefits along with the required timeline
  • Develops work plans, timeline and resource requirements to implement the appropriate solutions

With a good baseline, executives and directors should be able to answer the following questions:

  • Can we meet the reporting timelines required by the SEC?
  • Can we handle the complex accounting and disclosure requirements applicable to our industry? (Big challenges for 2018 include new revenue recognition and lease accounting standards.)
  • Is our IT infrastructure scalable to handle our expected growth?
  • Are we prepared to meet the guidelines for cybersecurity disclosures issued by the SEC?
  • Does the data used to manage and report our financial results have integrity?
  • Do we understand how we must prepare to comply with SOX requirements?
  • Will any unfavorable findings resulting from the audit of the previous three years of financial information have a negative impact on the timing of a public offering?
  • With international operations, does our internal control framework include the evaluation, mitigation and monitoring of potential corruption schemes involving foreign officials, regardless of monetary value?

Additionally, companies must ask themselves whether they have the internal bandwidth and subject-matter expertise to navigate the IPO transition. Often, the correct answer lies in seeking the right combination of outside resources and expertise to augment existing capabilities.

Start Acting Like a Public Company Now

There’s a big difference between thinking you are prepared, and knowing it. Pre-IPO organizations should have their post-offering management team in place months in advance, with strong players in key positions, including finance, legal and internal audit. Reporting infrastructure should be in place and tested with several quarters of dry run reports and disclosures. A public company consciousness must be developed among employees to ensure that everyone understands what actions and behaviors will be expected, and prohibited.

Who knows how long the next upswing or downturn, will last. A month? A year? Even if an IPO has to be postponed at the last minute due to market conditions, companies need to be ready for when the next opportunity presents itself. By getting ready to operate as if the company were already public prior to actually going public, companies can wait for the right window of opportunity with confidence, knowing they are poised and ready to take advantage of it.

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