aerial view of winding road and dense forest
aerial view of winding road and dense forest

Prepare to Function as a Public Company Before the IPO

Andrea Vardaro Thomas, Managing Director Business Performance Improvement
Matt Slocum, Associate Director Business Performance Improvement

The big picture: The U.S. initial public offering (IPO) market may be regaining its footing. Current market conditions mean companies considering an IPO have ample time for infrastructure buildout – arguably the most important phase of the IPO journey.

By the numbers: The number of IPOs priced to date this year has increased more than 40% and the total proceeds raised have increased by more than 100% compared to this time last year.

How to proceed: Companies considering an IPO should begin holistic preparation that positions them to become a public company and to function successfully as one. This includes a readiness assessment, a public-company-readiness roadmap, and ensuring their team includes the right internal stakeholders and external advisers.

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Despite continued economic headwinds and geopolitical pressures following the emergence from the global pandemic, there are indications that the U.S. initial public offering (IPO) market is potentially regaining its footing. The number of IPOs priced to date in 2024 has increased more than 40% and the total proceeds raised have increased by more than 100% when compared to this time last year

While this is different from the pandemonium-like enthusiasm that was experienced in the past, increased IPO activity is a welcome sign for private equity sponsors, their portfolio companies and other aspiring registrants who have been sitting on the sidelines. Given current market conditions, companies considering an IPO have the benefit of a wait-and-see approach, providing them with ample time for, arguably, the most important phase of the IPO journey – infrastructure buildout.

Infrastructure buildout: A crucial phase

Public company infrastructure buildout may not be top of mind when considering whether to pursue (or the timing to execute) an IPO. However, this arguably is one of the most crucial factors in the IPO journey. Holistic preparation not only to become a public company, but also to be able to function successfully as one, is a long and intense process that typically requires significant focused efforts well in advance of the IPO.

Start with a readiness assessment

The IPO journey is a long road, generally requiring a commitment of one year or longer from key stakeholders. The first and most crucial starting point for any company considering or exploring an IPO is to conduct a public company readiness assessment. This can provide companies with a view on the current state relative to public company requirements, identifying critical gaps and significant areas of focus (“long poles”) requiring key stakeholder attention to avoid IPO timing delays. The most common long poles identified by many pre-IPO companies include:

  • Completion of either two years of audited financial statements if the company is an emerging growth company or a smaller reporting company, or three years if not.
  • Determination of segments, including realignment of organizational structure, management reporting structures and key performance indicators (KPIs) that may influence the company’s equity narrative
  • Inability to close the books and prepare financial reporting with adequate performance analysis within required public company timelines
  • Infrequent and/or inaccurate financial forecasts
  • Major enterprise resource planning (ERP) implementations and integrations
  • Significant business combinations and related integrations

Identification of long poles early in the process will help ensure they may be actively managed and mitigated, with core infrastructure and cadences established to stand the test of the U.S. Securities and Exchange Commission (SEC) and shareholder scrutiny.

Key success enablers

Finance and accounting leaders must plan for and properly estimate the public company readiness effort inclusive of infrastructure buildout areas. Understanding the organization’s readiness for change, devoting the necessary resources, and aligning to desired objectives to be ready to operate as a public company is critical to post-IPO success. The public company readiness road map should incorporate efforts to address identified gaps, ensure the ability to scale for future growth, and meet the regulatory burdens imposed on public companies due to SEC requirements.

Develop a public-company-ready calendar

Pre-IPO companies should consider establishing a public-company-ready calendar and cadence, balancing immediate short-term IPO requirements with steady-state functional design no less than two quarters in advance of the planned IPO. This calendar may serve as a guide for conducting multiple “mock” public company quarterly processes, as well as a basis to evaluate and correct underlying challenges to achieve the timelines required of public companies. The following key success enablers should be considered when developing the public-company-ready calendar and related processes:

  • Accelerate the month-end close: The ability to conduct a consistent, accurate and efficient close and consolidation process within seven to eight business days following quarter end is critical to ensure ability to meet required SEC filing dates. Standardization and enforcement of accounting policies and procedures, as well as formalizing technical accounting positions (e.g., segments, equity, earnings per share) and unwinding any private company specific accounting positions will also be necessary. Significant business integrations and/or system implementations also should be considered, as such projects typically have an impact on a company’s ability to accelerate the close process.
  • Expand external reporting capabilities: The transition from a private to public issuer will require establishment of an SEC reporting function and related processes across the finance and legal organizations. Quarterly auditor reviews and incremental audit activities under the PCAOB standards, as well as drafting 10-Qs, should be incorporated into mock quarterly processes to establish the muscle memory that will be necessary for the preparation of quarterly SEC filings, including the relevant disclosures, as a public company.
  • Demonstrate consistent forecast accuracy: Establishing a consistent track record of producing accurate and timely forecasts aligned with overall business strategy is critical to instill confidence in quarterly financial projections. Leveraging scenario planning will help to assess the potential impact of volatile economic conditions, market shifts or strategic changes on financial projections that may be communicated externally as a public company. Financial planning and analysis (FP&A) should also ensure the ability to produce robust analysis clearly articulating the reasons for business performance based on key drivers, including non-GAAP metrics.
  • Establish the investor relations function: Companies will need to develop and implement robust processes to prepare the quarterly earnings release and conduct a quarterly earnings call. Incorporating a mock quarterly earnings call into the quarterly process will allow for refinement of messaging and coaching, as needed. Engaging with investors early in the process will also help to better understand investor expectations as the equity narrative is being honed, while determining relevant KPIs can help ensure that information is readily and repeatedly available.
  • Formalize Sarbanes-Oxley Act (SOX) compliance: SOX compliance will be an additional area requiring significant focus and efforts across the organization. While SOX compliance requirements are applicable mainly after the IPO, developing an annual SOX compliance program for the consolidated entity, identifying key control design and operation deficiencies, and implementing remediation plans to reduce the potential for any reportable deficiencies will be critical.

Ensure success with the right team

Navigating the IPO journey and transitioning from a private to a public company is a crucial process that requires both a well-coordinated team and extensive preparation. This includes not only the right internal stakeholders but also experienced external advisers who understand the intricacies of the IPO process, ensuring all aspects of public company readiness are addressed efficiently, from financial reporting to compliance and investor relations.

The transition from private to public company involves significant planning and a robust infrastructure buildout. The IPO journey may be complex and demand significant effort, but with expertise, dedication and preparation, companies can confidently embark on this path. As the IPO market continues to recover, it presents an opportune time for companies to prepare themselves to seize the opportunities that come with being a public entity.

 

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