Whether your company is contemplating a sale to a public company, an initial public offering (IPO), or another significant corporate transformation, there are a wide variety of complexities and operational challenges to consider.
Here’s 9 keys to success that will help you avoid common pitfalls along the way:
Identify the Key Drivers and Metrics of the Company’s Success Early
Companies should identify the key financial metrics and other information they plan to provide to potential acquirers, investors, & other key stakeholders post-transaction. This information should be consistent with metrics included in deal-related materials and/or future registration statements.
Specific consideration should be given to the metrics that peers use to describe their businesses and guide future performance, along with any additional supporting materials they provide. Clear definitions of these performance indicators and the ability to produce consistent data for metric calculations will be key to facilitate accurate future reporting to investors or the public markets.
Perform Valuations Early To Prevent Delays
Insufficient historical common stock valuations or failure to fully analyze financial instruments up front can leave companies scrambling to perform third-party valuations and receive sign-off from external auditors.
These costly delays can be prevented by:
• Evaluating a company’s historical common stock valuations
• Completing an inventory of all potential fair value instruments
• Assessing the required valuation dates
Maintain Detailed Legal Documentation and Ownership Records
To complete a sell-side transaction or IPO, company ownership interests—including preferred stock, common stock, warrants, and stock options—must be tracked accurately from inception to date, and all corresponding documentation must be maintained properly.
Companies must have capable systems and adequate processes in place for real-time tracking of stock-based compensation activity such as stock option grants, exercises, and forfeitures.
Maintaining quality legal records, including board minutes and stock option agreements, can help prevent costly delays during the transaction process.
Companies should also be prepared to provide corporate documents during the due diligence process.
Prepare Quarterly Financial Data for Sas 100 Reviews
For trending purposes, underwriters in an IPO often require that financial information for the most recent eight quarters be presented in the Management’s Discussion and Analysis (MD&A), and they may request “comfort” on these numbers.
Interim financial statements included in an IPO filing must be presented in accordance with applicable accounting standards.
Many private companies do not perform hard quarterly closes reflecting all necessary accounting adjustments (e.g., they do not “true up” tax entries on a quarterly basis).
This leads to unexpected delays as auditors complete their reviews of quarterly financial data—delays that can be prevented by identifying and recording missing quarterly entries before external auditors begin their reviews.
Don’t Underestimate the Time Needed To Complete Audits
Private companies generally do not have external audits performed in accordance with public company standards.
Annual financial statements presented in an IPO registration statement must be audited in accordance with certain standards. Companies are often surprised by the level of scrutiny external auditors apply during the transition to public company audit standards. It is not uncommon for external auditors to request increased documentation from management and reassess past judgmental accounting conclusions. Management should maintain an inventory of all critical accounting issues and prepare technical accounting memoranda documenting conclusions for each issue.
Consider the Implications of Acquisitions
Strategic acquisitions can greatly alter a company’s story and can lead to additional audit and reporting requirements.
Companies should consider each acquisition’s financial reporting implications.
Depending on the significance of an acquisition, a company may have to provide up to three years of audited financial statements for an acquired business and present pro forma financial information, which also must be reviewed by the auditors.
Enhance Systems and Processes
In preparing for a potential sale to a public company and IPOs, companies must evaluate their current systems and processes to determine if they will support life as a public entity.
As companies look to upgrade their systems, they should perform thorough evaluations of their requirements
and the available options, choosing platforms that meet their current needs and offer flexibility to grow as the respective companies grow.
Additionally, management should begin thinking about internal controls & related compliance initiatives. and its impact on the business and day-to-day processes. An initial internal control readiness assessment will provide insight into an entity’s key controls and help identify problem areas that require remediation for a company to ultimately achieve compliance after a sale to a public company or an IPO.
Assemble a Trusted Team of Advisors
A successful sale to a public company or an IPO requires effective coordination of numerous stakeholders, including company personnel, company counsel, underwriters’ counsel, external auditors, investment bankers, accounting advisors, investor relations resources, and valuation specialists.
These stakeholders are vital to the process and must be engaged early to ensure that they are ready to support the operations and growth of a company before and after the transaction.
External partners provide experience and expertise in completing both the sell-side readiness process, IPO filing and post-filing tasks.
Identifying the right external partners is integral to ensuring a successful and smooth transition to public-company life no matter how you enter the public markets.
Understand That the Transaction Is Just the Beginning
Successfully completing a sale to a public company or filing the effective registration statement in an IPO may feel like the finish line, but it is just the beginning in terms of life as a public company.
As public registrants, companies must consistently and accurately close the books and produce financial statements by the required reporting deadlines.
Companies often need to reduce financial close cycle times to meet reporting requirements and, in addition to producing timely financial information, companies must also provide accurate guidance to investors and analysts. A company’s stock price may experience negative pressure if actual results “miss” the forecasted guidance. Enhancing the financial planning and analysis (FP&A) function early in the process pre-transaction will provide an opportunity to fine-tune processes and avoid disappointing earnings calls and negative impacts on stock price.