With the IPO market in full swing, it is tempting for private company founders, investors and executives to consider their options and the pathway to a public offering. After all, a successful IPO – which depends on investor sentiment – may be easier to pull off right now. Investors who once focused on near-term or current profitability are now seemingly more willing to buy into a company whose first quarterly profit is at least two years off.
But that doesn’t mean any company can roll up to public markets and expect a successful public launch. The IPO process takes several months of preparation and execution. Understanding some of the key mileposts is essential before beginning down that road.
Preparation for an IPO involves significant resources. During the IPO stage, companies must present a convincing growth story, illustrated by their financial data. The company must establish the right key performance indicators (KPIs) – the measuring sticks for financial performance and target-setting. KPIs are not separate from more standard measurements of financial performance such as earnings per share and top-line revenue growth. Rather, KPIs are often the drivers of those financial results, as they are distinct to a company and its mix of products and services.
Investors are deeply interested in growth stories. As such, customer metrics like subscriptions or renewals, unit sales, and both financial and non-financial metrics like free cash flow and user information are critical. A typical IPO document details these KPIs, establishes a benchmark, and the company returns to some or all KPIs in future earnings releases.
Additionally, consistent and predictable forecasts can form the bedrock of strong relationships with the market, investors and analysts. Thus, accurate forecasting is a regular part of IPO readiness discussions, leading to discussion around data analytics, tools to develop deep customer and business insights and overall improvements in finance processes and policies. While there are no guarantees in a company’s financial performance, investors and analysts prefer surprises to be kept to a minimum. Therefore, public companies should consider building foresight, caution and risk in the forecasting models.
At the heart of IPO readiness discussion lies financial reporting. Conforming to SEC rules and regulations and PCAOB audits requires a company to understand any current gaps in financial reporting and establish a transparent process for collecting and verifying critical financial data in a timely way.
While technical accounting and SEC financial reporting discussions are common, there is significant discussion around people, processes and technology with respect to overall financial reporting. There is also discussion around understanding the company’s current close processes and how it could be optimized for the rigor and timeliness needed for public company reporting.
And then there is the larger matter of governance and oversight – a board of directors to guide management, build relationships with investors, provide oversight over key policies, and pose challenging questions about the company’s outlook. An effective board represents a diversity of skills, outlooks and backgrounds, all of which can be a source of strength to the CEO, CFO and other leaders.
There are other challenges for companies to consider during the pre-IPO preparation period. They touch on vital and material issues, including cybersecurity and data privacy, human resources, controls, and tax planning. These issues can be addressed by a dedicated team of managers, supported by external resources.
One last thought – a typical preparation includes two quarterly “dry runs” of closing and reporting financial results. That kind of record is essential – and, right now, more essential than demonstrated profitability. But good financial reporting systems and processes, combined with market-ready governance protocols and directors, never goes out of style.
For more information, contact
Los Angeles: Ashok Parmar, partner,
Deloitte & Touche LLP,
805-405-0174.
