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IPO Readiness

What is IPO Readiness?

A privately-owned company seeking capital and growth may make the important decision to offer a piece of ownership in the business, or equity, to public investors. It will do this through the sale of stocks in the company over a public stock exchange.

The first, or initial, stocks sold are referred to as the initial public offering, or IPO. It is an extremely consequential juncture in the trajectory of a company that leads to the infusion of financial resources to support future growth, but it also invites a heightened level of scrutiny from many outsiders and new stakeholders who previously may not have had any interest in the company's activities.

Businesses have been going public for hundreds of years. The process has generated news and invited more scrutiny in recent decades with the highly publicized IPOs of some companies, and particularly the increase in digital innovation of technology start-ups.

IPO readiness involves the preparation by a company for this important process of going public and the scrutiny by regulators and potential investors that it entails. It will require thorough preparation regarding many of the company's activities, including financial reporting, governance, and internal processes. Adequately refining and preparing all these processes is crucial to the success of the IPO.

When Is a Company Ready for an IPO?

Going public is a transformational event in a company's life cycle. Knowing when to consider an IPO, and knowing when the company is ready for it, are complex decisions that involve many factors.

The primary driving factor in the decision to have an IPO is growth.

If a company has a unique product or service and has reached a point in its development at which it can greatly expand with the help of additional capital, it may be time for an IPO.

Executives must honestly and thoroughly assess the market and their competition to determine if the product or service they are offering is unique and promising enough to attract public investors.

The business should be able to offer the prospect of near-term growth that far exceeds moderate levels to attract buyers in an IPO. Stock purchasers will not be looking for a safe investment with conservative trend lines. They will want the strongest possibility of exponential growth.

Once executives have determined with confidence that the business is at this juncture, they will need to begin the important process of preparing for an IPO. Several factors will contribute to a company's readiness:

  1. A business should have a strong leadership team and board of directors that will inspire confidence in future shareholders. Talent, experience, drive, and vision are the qualities company founders should look for in assembling the team they want to help them usher the business into the next phase of its lifecycle.

  2. Potential investors are also looking for a business with solid financials. An IPO will invite a new level of scrutiny of the business's financial statements and reporting. Stock buyers will want to see that this information has been provided consistently, transparently, and with a high degree of accuracy.

  3. Finally, a business that is preparing for an IPO must scrutinize its internal controls and processes. Executives should be able to assert with confidence that their governance, accounting, and financial reporting processes are structured and functioning well enough to withstand the new demands that a publicly held company must face.

3 Critical Steps To Include in Your IPO Readiness Checklist

Businesses will want to perform several steps in preparing for an IPO:

1. Financial preparation is essential to demonstrate to investors that the company is healthy and sound.

They will want to understand the business fundamentals that are being used to set the stock price for the IPO.

Liquidity coupled with strong projections for growth, sales, and profit are all essential to presenting an attractive business proposition for a stock purchase.

A business must also perform legal and regulatory compliance. IPOs are governed by several federal statutes: The Securities Act of 1933 requires the sale of securities to be registered with the Securities and Exchange Commission (SEC) or to qualify for an exemption.

The issuer of the stocks must file a registration statement with the SEC that contains required disclosures, and the SEC must have declared that statement effective.

The Securities Exchange Act of 1934 also requires a prospectus to accompany the registration statement.

The process is also regulated by the Financial Industry Regulatory Authority (FINRA), which will review the registration statement and other required documentation submitted by financial underwriters that are participating in the IPO.

Lastly, companies must complete a separate application process to list the stock on one of the U.S. stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq.

The legal and regulatory standards affecting an IPO will require the company to make substantive changes to its governance structure. These changes will involve the size and composition of its board of directors, committees and executive sessions, anti-takeover measures, codes of conduct, corporate governance guidelines, insider trading policies, and environmental, social and governance (ESG) policies. These structural and policy changes will need to be documented in the company's charter and bylaws.

Investors will also want to see that the business has operational stability. Internal functions across the business spectrum, including accounting, sales, billing, and delivery should all be functioning smoothly and efficiently. Investors will want to see that the business has developed and maintained a well-run system to deliver a product or service and maintain a steady and reliable revenue stream.

Before an IPO, business leaders must know and understand their competition and be confident that they can stand apart. A thorough and sophisticated market analysis will give them the necessary insight. They must understand broad macro-economic trends as well as specific, micro-factors affecting the industry in which it operates, both of which can have a strong impact on the success of the company. Leaders must know their product or service well, and they must understand how it will fare against the competition. Having this information will help them to make their value proposition to potential investors.

2. Managing investor relations will become an important function within the company once it begins the process of going public. An investor relations department will be responsible for providing detailed information about the company and its products or services to regulators and investors.

The department will share this information through financial statements, audits, data, and other means. It will conduct shareholder briefings, press conferences, and interact with regulatory agencies.

Many of the activities of an investor relations department are governed by federal legislation passed in recent years to increase reporting requirements and prevent excessive risk, such as the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009, and the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009.

The quality and composition of a company's management team factors significantly into an IPO. The members reflect the company's philosophy and personality, and its potential for success in the market. Whether the team can inspire confidence in potential investors could be a deciding factor in the success or failure of the IPO. Future stock buyers will look for a team that consists of talented, experienced, and dedicated individuals with a track record of success in similar markets, as well expertise and knowledge about the product and the specific industry in which they are set to launch.

3. Technology infrastructure also plays an important role in an IPO, especially in this digital age. To succeed in any market, a business must have the proper technological systems in place to help it meet the challenges and the rigor of an IPO and the marketplace. Proven systems that effectively support the business's ability to provide reliable data, fulfill financial reporting requirements, satisfy regulatory compliance, provide cyber-security, and enable the business to grow, are integral to success and will help inspire investors.

Business leaders must undertake effective risk management before embarking on an IPO. This entails comprehensive understanding of all the new risks, demands and regulatory requirements that the company will now be expected to satisfy. Thoroughly considering risks in the marketplace, planning properly, and having contingencies and safeguards in place, will give the company the resiliency it will need to take calculated risks in the future that support the kind of competitiveness and future growth that investors like.

Why IPO Readiness Matters to F&A

IPO readiness is extremely important to a business's finance and accounting (F&A) processes because of the significant changes it will entail.

A successful IPO will require modifications of finance and accounting processes across the organization. Changes will take place in several ways:

The business will need to be prepared to produce timely and accurate financial statements to comply with regulatory requirements and to provide info to investors.

The business should assemble an experienced and capable team of F&A professionals who can usher in the necessary changes.

The Chief Financial Officer (CFO) will play an extremely visible and important role in the IPO. The right person with the requisite experience should be put into this role well before the IPO takes place to ensure that the business is ready when the time comes.

Finally, internal processes, controls and infrastructure will need to be established, including the appropriate technology, to support the company during this highly visible transition.


What Is the Typical IPO Timeline?

The timeline for an IPO can vary depending on the company, how it is organized, and how it is managed. A business that has put all the right pieces in place may take a year or less to go through the process once it makes the decision to start.

The timeline consists of several steps:

One to two years before an IPO, after gathering and considering the proper financial information and market analysis, company leadership will make the decision that it is time to go public.

Following the decision, the business will go through a stage of pre-planning and assembling the right team to meet the challenges of an IPO.

Three to six months before the IPO, the business will file its registration statement with the SEC and begin to perform the necessary scrutiny of its financials.

As the IPO approaches, about one to three months out, the business will begin to market to potential investors.

This will include the so-called IPO roadshow, which consists of a series of presentations and marketing pitches on the company's value proposition targeting investors and made at remote venues, with the intent to drum up interest in the company stock.

Finally, during the IPO week, the business will begin to sell shares to investors.

Who Is Involved in an IPO?

A company going through an IPO will rely on the expertise of many people, inside and outside of the business, as well as other affiliated businesses. The leadership team, consisting of the CEO and board of directors will be the face of the company.

The CFO will play a vital role in the generation of important financial statements and other crucial information about the company.

The business will also form a partnership with an investment bank, known as an underwriter, who will help with the IPO by filing important regulatory statements, pricing, marketing, and selling of the stock to investors.

The business will also want to hire certified public accountants, lawyers, and others with IPO expertise to help it prepare.

What Are the Risks of Going Public?

Taking a company public poses many risks. Once stocks are sold on a public exchange, the level of scrutiny increases. Regulators, shareholders, and the public will now have a heightened interest in the company as well as access to data about its operations.

The business will now have to comply with new reporting requirements. The risk of lawsuits on issues like insider trading increases.

The IPO is a truth test about the business’s ability to survive and strive in a highly competitive marketplace. Its financial statements will experience intense scrutiny, and its value proposition will be put to the ultimate test. The company will have tremendous pressure to deliver on its promises to investors by showing strong revenue and growth in a relatively short period of time.

What Happens After an IPO?

Immediately after an IPO, the business will go through what is known as a lock-up period. This is a period lasting between 90 and 180 days, in which early employees and investors aren’t allowed to sell their shares. This is designed to ensure that the stock price remains steady in the early months by preventing those early investors from cashing out too quickly and selling off their shares.

How Do IPOs Impact Employees?

In the early stages of a company's life cycle, it may have offered stock options or restricted stock to its employees in exchange for modest compensation. This usually entails purchasing or owning the stock at a lower than market price.

When the company goes public, employees may be able to sell those stocks at the newly established market prices, which could translate into a significant profit. However, the sale of those stocks will be restricted by the lock-up period.

How BlackLine Helps You Assess IPO Readiness

Improving your accounting processes is critical to readying an organization for an IPO. Establishing a strong control framework, auditable processes, and accounting automation to reduce error-prone and repetitive tasks drastically reduces the likelihood of risks and breakdowns in those processes.

BlackLine enables organizations to meet their IPO goals with technology that enables automation, control, and visibility across accounting processes to significantly enhance the accuracy, timeliness, and completeness of financial reporting results.

For more information, read the IPO Readiness White Paper by Blackline.