By Leslie Leach. If there was one takeaway from the “IPO Readiness” track at the Armanino Evolution conference in Silicon Valley last week, it was how much longer it takes to get “IPO ready” than anyone realizes.
Companies choose to go through the IPO process for many reasons including to access capital, attract employees, and build their prestige – which typically boosts sales. Professor Kirk Knapp, CFA and member of the Finance Faculty at Saint Mary’s College (and conference speaker,) claims that the cost and time of preparations is one of the main reasons companies choose NOT to “go public.” According to professor Knapp, the process takes at least 12-18 months, and requires an entire “being public team,” as your current team doesn’t necessarily know how to act like a public company – and by the way, they also have “day jobs.”
Knapp recommends acting like a public company for at least a year before you actually become one. That means establishing independent governance, complying with requirements including GAAP and Sarbanes-Oxley, and building a financial reporting system that is not only accurate, fast, and tested – but also SOX 404-complaint. You will need to hire an auditor, underwriter, legal team, IPO advisor, and many others to assist you. Besides the time and effort, for hard costs he presented PwC survey data that showed more than four million dollars in direct costs on average for an IPO netting up to $50 million in proceeds, and more than eight million in costs for an IPO netting between $50 and $100 million in proceeds. Indirect costs nearly matched the direct costs.
In a follow-up session on best practices for IPO Readiness, Matt Armanino, Partner and COO of Armanino, and Peter Bardwick, CFO of Nitro, presented many practical recommendations. First and foremost, the responsibility rests with the CFO to advocate to the CEO and Board to start early. These stakeholders want to minimize risk and save money. Quicker is not always better, and rushing the processes can cost you. When you condense the preparation activities down to 6 months, you will spend 20-50% more on outside assistance to complete the required tasks, according to Armanino. In addition, of the 1800 companies since 2014 that have gone public, 1 in 3 has filed a restatement (according to the Center for Audit Quality.) Besides punishment in the stock market, Armanino added that the stresses that lead to restatements, even if there is no actual restatement, lead to poorly executed deals.
For any CFO organization, operating like a public company can be the right thing to do even if you don’t plan for an IPO exit. But if you do think an IPO may be in your future, carve out an adequate timeline, so that you will not only minimize risk and cost, but also be able to engage in proactive, value-creating activities such as:
- finding a great audit committee chairperson
- developing Wall Street relationships early
- getting an adequate ERP system in place
- improving your close cycle
- practicing mock earnings calls with your Board
- identifying data sources and ownership for reporting requirements
- putting in a strong FP&A system and process
- developing a well-balanced IPO team of internal resources and advisors
- and perhaps most importantly – taking the time to think!
For more details on getting IPO ready, download Armanino’s white paper, The CFO’s 5-Step Guide to IPO Execution.