Euphoric. One of many words used to describe the memorable and historic year of 2021 in the United States public markets. After a record-breaking year for the Nasdaq and NYSE exchanges with 1,053 total initial public offerings, market conditions turned volatile due to the uncertainty from macroeconomic conditions, geopolitical tensions, inflation, and rising interest rates.
As valuation multiples subsequently fell off a cliff, companies contemplating IPOs pressed the pause button or ultimately canceled their IPO plans entirely. The Nasdaq and NYSE exchanges saw only 191 total IPOs in 2022, according to data from Audit Analytics. Headlines are still ruled by inflation, a potential recession, and now banking turmoil, which has many companies and investors wondering when the next IPO window will open.
While achieving an IPO is a monumental milestone, it is imperative for management to understand going public is more than a singular transactional event. This process is a transformation of the business, which typically includes enhancing the current business processes, controls, and infrastructure in place to support the additional financial reporting requirements and operational needs of a successful public company. For a successful transition, proper planning and IPO readiness is crucial.
The CFO’s IPO to-do list
CFOs play a critical role in preparing for an IPO and will have many responsibilities during the process, including development of the organization’s future strategic roadmap, preparing the company for accurate forecasting of financial performance, and creating an investment thesis to pitch to potential investors on roadshows.
Often organizations underestimate the time and effort the IPO readiness initiative requires. The readiness process requires additional attention and time-consuming tasks.
For example, in addition to carrying out the process of transforming the organization into a public company along with their operational responsibilities, executives must also make sure all registration statements include audited financial statements and the frequency for financial reporting increases from an annual to a quarterly basis.
Further, all financial statements in registration statements must comply with the form, content, and updating requirements of Regulation S-X and be audited in accordance with Public Company Accounting Oversight Board standards, which include additional independence requirements.
In the event the current auditor is not a PCAOB-registered firm or performed any services that may have impaired independence, the company may need to be re-audited by an independent PCAOB registered firm. For companies that have not been audited under PCAOB standards or performed full quarterly financial reporting closes, this adds more complexities and burdens.
Additionally, CFOs are responsible for determining whether the organization has the necessary human capital and infrastructure to support the IPO readiness initiative. Given the recent scarcity of labor resources and a highly competitive labor market, finding qualified resources at a reasonable price to build talent in a timely manner can be challenging.
Buying IPO experience
“Buying talent” through hiring an external advisor might be more efficient and one of the options that CFOs can consider as they navigate the road to going public. Although external advisors may come at a higher monetary cost to the organization, there are benefits that CFOs should strongly consider in their decision.
Nothing compares to prior experiences of being in the trenches. External advisors can act as subject matter experts with extensive IPO and capital markets experience that can help CFOs and internal accounting teams navigate the added technical requirements and expectations for public companies.
While no one can be certain when the tides will turn, companies considering a public listing should start the planning process now. There are no assurances when the IPO window will open and when it does, how long the market will be receptive to public listings. Although an external advisor may come at a higher monetary cost, bringing on a team with a proven track record will provide much needed support to the CFO and may ultimately be key in solidifying a successful IPO readiness process.
Written by Nick Theos. Originally published by CFO Dive.
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