An Ounce of Readiness: Lessons Learned From The IPO Process

Launching a successful IPO is a complicated and complex process.

Smart companies will start making investments at least two years before to meet objectives.

Over the course of this year, I’ve been watching a definite uptick in IPOs – both throughout the country and here in Orange County, CA where Blythe Global Advisors is located. That’s good news for all of us. In fact, in response to a burst of IPO engagements in the first half of 2012, we decided to formally add a full spectrum of IPO readiness services to Blythe Global’s solutions offerings. As the year comes to a close, we’re continuing to garner new IPO engagements. In the event that some of you are considering an IPO, I’m focusing this newsletter on what I’ve observed during those engagements with the hope that the lessons my clients learned can help you. And I’ll tell you the bottom line at the outset: When it comes to IPOs, an ounce of readiness can reap huge dividends. Launching a successful IPO adds an immense bubble of work above and beyond a business’s normal activities. Those of you who have gone through this process know what I’m talking about and probably have scars to prove it. I tell my clients an IPO is like changing tires on a car while the car is moving. Moving the car is running your business; simultaneously changing the tires is launching the IPO. That said, readiness is not as obvious or simple a concept as it might first seem. Readiness is expensive. Companies need to make a decision early on – when an IPO might still only be a remote possibility – as to whether or not they’re going to make the necessary investments and cultural changes to enable them to operate to public-company standards before they are obligated to do so. Two years before is the minimum timeframe a company should consider for transitioning to public standards. Even with a two-year window, companies should be prepared for lots of stress and more than one or two surprises or setbacks – especially in the current expanding regulatory environment. For companies who determine they can’t afford such early investments, the decision should be a conscious one and made with awareness that the company is not avoiding pain; they’re simply delaying it – with the likelihood of greater pain and cost down the road. Where should a company invest their precious revenue and time for optimum results? Here are my top issues based on our 2012 engagements. Skilled resources: Thinking and acting like a public company require executives and staff with public-company skills and experience. A qualified CFO should be in place at least two years before the planned IPO – one with experience growing businesses who can build a top-flight accounting and finance team capable of delivering audit-ready reports that comply with the requirements of U.S. GAAP/IFRS, the Sarbanes-Oxley Act, the SEC and the PCAOB as well as take into consideration the implications of evolving legislation such as Dodd-Frank and the JOBS Act. These folks will need a robust IT infrastructure to enable repeatable, predictable processes to forecast the business correctly; produce accurate, on-time reports; and implement and maintain effective internal controls. Qualified advisors: The road to public status also requires highly specialized skills for which a company needs trusted advisors. Here, that qualified CFO is essential to help the company hire and establish relationships with the necessary external organizations – audit firm, law firm, investment bank, investor relations agency and trusted IPO advisory firm. The first four organizations have very specific responsibilities with rigid rules to avoid conflicts of interest. The fifth, an experienced IPO advisory consultant, can fill the gaps between internal and external responsibilities without such conflicts – helping to build the right infrastructure, filling resource shortfalls, assisting in the preparation of current and historical statements, and generally providing a broad range of pre-, during and post-IPO advice and services to ensure the company always knows what’s needed and when it’s needed. Timeline and communications: Going public is foreign territory. Companies do best when they have a road map. Setting major target dates gets everyone on the same page and provides the framework for establishing priorities and drawing up the master schedule. Having all key internal and external parties participate in determining the launch date ensures more realistic targets are selected and helps engender buy-in. On the communications side, implementing a strong and consistent employee communications plan may be a significant investment, but it will move the culture to a public mindset – which is absolutely critical for the successful implementation of new processes and procedures. Regular meetings with external constituencies may be billable, but they’ll ensure strong cross-functional communication, enable more efficient teamwork and keep the schedule on track. Documentation: The level of documentation required for a public company is incomparable to how a private company operates. What was acceptable in the past can create a false sense of security and come back to haunt a company during IPO preparation. Even companies that had employed an audit firm all along will find the scrutiny ratchet up. Investment bankers, regulators, lawyers as well as auditors will require extensive documentation of all policies, transactions, backup, etc. Companies backed by venture capital firms and operating on a shoe-string budget are especially vulnerable in this respect. This is where that conscious decision to invest in advanced processes and practices comes into play. Reviewing documents for proper accounting outcomes is a large, complicated, labor-intensive undertaking for which most companies engage an IPO advisor. How costly those engagements ultimately are depends on whether the company has built a foundation of public-standard operation or whether work has to start from scratch – with all the accompanying confusion and inefficiency that going back and rebuilding the past implies. Technical review/accounting guidance: Have transactions been supported, reported and accounted for as required under relevant accounting literature? Were revisions to agreements properly appended to original transactions? Were all transactions tracked against their impact on profit and loss? Were potential shareholders well informed? If the answer to any of these questions is no, then the company needs to undertake what can only be described as a forensic engagement that will be largely dependent on oral history – recreating the past, revisiting the full impact and, possibly, restating results. Anticipated transactions should be included here, too, to make sure any future deals achieve the desired and right accounting and save costs going forward. Here again, the ultimate time and cost depends on the level of public compliance to which the company has been operating. Reporting and forecasting tools: The upgrade from simple financial statements to the full panoply of quarterly and annual reporting requirements is steep. And the process goes beyond the expense of installing advanced tools and an enterprise-wide accounting system. It needs to be a combination of upgraded tools and upgraded skills – those experienced people I cited above who are able to use the tools and augment the output with the management statements and footnotes required for public reporting. This is another area where that conscious decision to invest long before an IPO is at hand comes into play. It’s my observation that companies that don’t make early investments but opt to change from inadequate accounting systems to more sophisticated tools after beginning an IPO journey incur the most costs and the most pain – with the greatest pain being possibly unable to go public on time and losing public confidence. Even companies that are better prepared have a hard time moving up to regular, compliant, accurate reporting. The good news is that upgrading reporting capability and skills early provides a good foundation for whatever option a company might eventually choose – merger, acquisition, sale – albeit with varying returns on investment. Stock award tools: Some companies wrongfully calculate this as a “one and done” – install some tracking software, input available data and check it off the to-do list. Here again, readiness goes beyond tools. Most private companies have a wide-open process involving many different kinds of potentially complex options and other awards along with an incomplete approach to documenting and archiving those issuances. To pass public scrutiny, companies need to get their equity structure buttoned up. That means implementing a formal, disciplined, defined program that has board approval and then ensuring that all awards issued – under old and new plans – are fully and properly executed, documented and valued. In summary, for most fast-growing companies going public is often the next logical step to increasing value. Happily, we’re in an environment where IPOs are on the increase after a long period of inactivity. Unfortunately, most fast-growing companies are not as prepared to go public as they might assume. The good news is that with the right investments and trusted partners companies can make the leap successfully. At Blythe Global Advisors, we have the experience to help companies launch an IPO efficiently and on time. As trusted consultants, we can fill the gap in financial and accounting expertise between a company and their audit firm, investment bank or law firm without conflict of interest. If you’re considering an IPO, we’d be honored to help you.

To discuss this important topic further or if you’re looking for general accounting advice and counsel, contact marc@blytheglobal.com