With the Covid-19 pandemic raging and the related turbulence in the financial markets, a number of high-profile companies have postponed or slowed the pace of their initial public offerings (IPOs). Based on historical trends during other downturns, the pause on IPOs likely will continue even after markets stabilize, as firms observe a cooling-off period until they gain enough confidence in both markets and valuations to make the transition to become publicly held.
None of this is surprising. Companies typically pause their IPO activity during periods of extreme volatility and accelerate such offerings some time after investor demand rebounds. However, even in an economic crisis, firms contemplating an IPO would be wise to prepare for windows of opportunity. Readiness is everything for such a game-changing endeavor, and to optimize their chances of success, companies must assess the long-term timeline and be primed to move when circumstances are right.
Such readiness cannot be achieved at a moment’s notice. Transforming an enterprise into a public company typically requires 18 to 24 months. It also requires a close review of policies and processes across the breadth of the organization. For those firms that have already become SEC registrants, it calls for the maintenance of sound financial reporting, corporate governance and other public company obligations. In short, preparing for an IPO means that a firm must develop a consciousness of what it is to be a public company, even while its launch plans are on hold.
How to Prepare and Remain Ready
If a company is even considering an IPO in 2020 or 2021, it should take the following measures now to be ready to strike at the opportune time:
- Review IPOs among peers and organizations in the industry, as well as recent SEC rulings and guidance. By reviewing questions and responses posted on the SEC website (after the peer becomes “effective” publicly), a firm can learn from the mistakes of others and close the gaps that led to past SEC inquiries. The pre-IPO firm should also study overall SEC trends to build an awareness of potential pitfalls.
- Develop a baseline understanding of the current state of the company. What is the readiness of the company in terms of policies, processes, talent, reporting, methodologies, systems and digital maturity? Critical areas to consider include financial reporting, financial close capability, corporate governance, Sarbanes-Oxley Act (SOX) compliance reporting and IT scalability.
- Prepare a project plan to close the gaps revealed by the baseline study. Develop timeline and resource requirements to address gaps. Some companies may become concerned that their financial reports will go “stale” if they prepare them too early; instead, they should worry about maturing the firm’s reporting processes. Mature accounting systems can refresh financials within a reasonable time of a period close.
- Assess the firm’s transition readiness for an IPO. Companies must ask themselves whether they have the bandwidth (through internal resources), crisis operational resiliency and subject-matter expertise to navigate a public offering. The prudent option for this once-in-a-generation event is usually a combination of outside expertise and existing capabilities.
- Operate like a public company sooner rather than later. There’s a big difference between thinking an organization is prepared to go public and living the reality. Pre-IPO companies should have their post-offering management team in place months in advance. They should have strong performers in key roles, including but not limited to finance, legal and internal audit. Reporting infrastructure should be well-functioning and tested over several quarters through dry-run reports. A public-company consciousness should pervade the organization so that all employees understand the actions and practices expected of them.
No one knows how long this market downturn will last. It could be another month, a quarter, or more. Even if an IPO has to be postponed or withdrawn, however, companies need to be ready to file when conditions open up. By modeling its operations as if the organization were already public, a firm can wait for its window of opportunity with confidence, knowing it is poised and prepared to take advantage of it.
One excellent resource is Protiviti’s Guide to Public Company Transformation: Frequently Asked Questions. In the Guide, we delve into the items IPO-bound companies should consider right now, while they wait and prepare for a better time to price and sell securities.