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SEC Insights - January 2017

 

Are You Ready for an IPO?

Contributors: Michael Feinstein, Partner, Assurance Services & Lisa Delfini, Partner, Assurance Services

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Your company is thinking about going public. The management team is dreaming of the day the bell will ring and your company will make it onto the ticker, signifying easier access to capital. But you are wondering how you will do it all. How will the current team handle the accounting and reporting requirements?

It won't be an easy journey; otherwise everyone would be doing it. The journey to becoming a public company is a long, difficult path, along a slippery slope of regulations, rules and reporting. There are many challenges and a lot of decisions to be made along the way. The decision to go public can be exactly what a company needs to skyrocket to the next generation of capitalization and growth, but without proper planning, it can become a painful waste of time and money.

Any company contemplating the initial public offering process must weigh that short-term objective against the company's long-term goals of growing and building a sustainable enterprise. However, before you start choosing attorneys or underwriters, or even writing your prospectus, you need to ensure that you have taken the essential steps to ensuring a successful offering.

Build Your Infrastructure

Ensure that your company is ready to handle the influx of tasks at hand within the required deadlines. Developing the infrastructure of people, systems and processes first will ensure that you have the building blocks to run a public company.

Some questions to ask yourself, when assessing the infrastructure are: Do you have the right mix of individuals? Does your finance department have experience with SEC reporting? Does your team have the resources needed? Do you have a well-documented system of internal controls?

Do you have the right mix of individuals? The infrastructure starts with the Chief Financial Officer, as the CFO will have the ability to first assess the capabilities of the current team and supplement that team with additional resources to fill any gaps, such as:

  • Ensuring that the controller has the ability to run the day-to-day activities of the company, report historic results and provide much-needed data to the rest of the team.
  • Identifying a financial analyst who can prepare projections and organize information in order to attract investors.

It should come as no surprise that, as a public company, your financial reporting will occur at a significantly higher level than at most private companies. Not only will you have to answer to a board of directors, but post-IPO, you will be accountable to the investment community, regulators and the public, all of whom will have high expectations. Quarterly financial statements that have been reviewed by your auditors and annual audited financial statements will need to be filed with the SEC within tight timeframes. These financial statements will include more disclosure than that required for non-public companies. In addition, financial reporting will include more than simple historic results; rather, it will paint a picture of the company's performance, its direction, its philosophy and its vision. The SEC staff will review your annual filings once every three years or more frequently, and you will need to respond to their comments. The SEC staff's questions and your responses will become public documents. This SEC also requires separate filings alerting the public shortly after executing significant transactions. In addition, the investor community will expect quarterly webcasts and press releases to precede the filings with the SEC. These will likely also become the responsibility of the finance team. So, knowledge and experience within your financial team becomes increasingly important when contemplating an IPO.

Does your finance department have experience with SEC reporting? You need to ensure that your team has experience with SEC reporting; so identify an experienced SEC expert who can navigate the nuances and requirements of filing an initial IPO and subsequent reporting. The IPO process requires a multi-functional detailed project plan so that progress can be tracked and deadlines can be met. Without such a plan, the process is likely to flounder. Once the company is public, you will need to adhere to a quarterly closing and reporting calendar. A resource with SEC experience can create these plans and calendars to keep the team moving in the same direction at the right speed.

Does your team have the resources to withstand the rigors of the IPO process? The IPO process includes creating a comprehensive financial document that will be filed with the SEC. Your auditors will need to review all the information in the document to ensure consistency with the audited financial statements. The SEC staff will review the document and issue comments that must be addressed in a revised document (also filed with the SEC) prior to allowing the public to invest in your company's securities. It is not uncommon for SEC staff to issue two to three rounds of comments. All-in-all, this process can take three to six months to navigate. Do not underestimate the amount of time and effort the IPO process will take and the amount of resources that will be needed. Senior management of the company will also need to be educated regarding this process to ensure that they have realistic expectations that can be married with market timing. Your teams not only have their new tasks of helping and guiding the company towards an IPO, but they also have their day-to-day jobs. Identifying whether the team has the necessary resources will be increasingly important, and any gaps should be filled with new full-time employees or project consultants.

Do you have a well-documented system of internal controls? A hard look at the company's internal controls and processes should be undertaken. Not only will it make the company more efficient and help reduce transactional and reporting risks, a focus on controls will be a must for auditors, boards and audit committees, particularly if there are high-risk gaps. This will take effort in all areas of the company, from the CEO and CFO to operations. The key is not to focus solely on the IPO process, but to get your company ready with the necessary systems, processes, controls and reporting. A common mistake private companies often make is assuming that, because they are audited, they are ready for the public markets; but there is much more to consider than audited financial statements.

For instance, many companies will find the documentation, adherence and testing requirements to be more significant for public companies than for private. Additionally, the SEC requires public companies to map their internal controls to the COSO Internal Control – Integrated Framework, and management is required to test these controls in order to assess their effectiveness. Adherence to this requirement is required for both small and large reporting companies, and although small reporting companies are not required to have their internal controls audited, this requirement can add a new dimension and increase costs.

Outsourced Professionals

Now it is time to think about what experts or advisors you will need to help take your company public. After selecting your internal team, there are other resources the CFO should consider, such as attorneys, auditing firms, bankers and underwriters, and know the timing of when each should be mobilized. Hiring these outsourced professionals can be costly, so bringing them in at the right time will help keeps costs down.

Accounting and tax complexities as a public company can be vast. Many private companies do not encounter these challenges; therefore, CFOs need to be sure their teams are equipped and supported to handle the unforeseen, ensuring they are "anticipating" rather than "reacting" to these complexities.

Know Your Business!

The finance group should communicate and interact with operations and collaborate. They should become more involved as the deals are made and the contracts are signed. All too often, the finance group is the last to know, which allows limited time to assess the impact of transactions on the company's results. By collaborating, the finance group can present the impacts and suggest alternatives.

Timing, Timing, Timing!

It is said that the effort to go public could take from 12 to 18 months, and that is with proper planning. Many companies take this for granted, but there will be snags in the road, as markets and opportunities come and go. These factors all need to be considered. An IPO is like a marathon. You cannot just wake up one day and expect to accomplish the hardest run of your life by nightfall. It takes months, if not years, of preparation and a good set of sturdy legs (your team) to finish the race.

By preparing appropriately, you can lead your team to victory with coordination and a lot of sweat. Months may pass, you'll have had little sleep, you'll have spent hours at the printers with the attorneys and the underwriters, but it will all pay off. The bell will ring, and there it is: your ticker, your company. It's official - you are now public!

 
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