With high-profile IPOs under the microscope now, and in the wake of a rush of technology companies going public in 2011 and 2012, people seem to be focused more than ever on initial share prices and valuations.
Young companies must step back and look more deeply into their IPO preparedness. While the majority of the focus around an IPO is on public filings and road shows (thanks in large part to extensive media coverage surrounding the IPOs of well-known companies), sophisticated boards and management know that thoughtful planning and assessment around the private-to-public transformation goes well beyond the offering and must begin well in advance of that event.
There is no shortage of rushed IPOs that have left businesses hamstrung in many areas — creating unnecessary and excessive expenses, both in time and cost, after the fact. It also is important to note that while technology companies continue to garner headlines, the best practices around the process of transforming a company from private to public — as well as the pitfalls — transcend industry or sector.
Because reporting and compliance requirements for public companies have increased in quantity, scope and complexity over the last decade, companies are more vigilant than ever and typically go through more rigorous financial reporting well before, and even separate from, their plans to move toward a public offering.
However, robust and disciplined financial reporting processes and systems aren’t the only areas of concern. Many start-up entities operate for extended periods on “shoe-string” infrastructures and, either after becoming a publicly traded entity or even during the pre-IPO stages, underestimate the extreme transformational challenges of becoming a public company.
Though there are numerous areas where pre-IPO companies frequently stumble, a few are more prevalent than others:
●Assembling the right team: Public companies must have experienced senior management that can deal with investor and analyst expectations. The CEO and CFO should be in place well in advance of commencing the IPO process to understand the business implications completely and prepare the organization appropriately for the road ahead.
In addition, public companies usually require new skills for the board of directors as well as other management levels to address governance and increased reporting requirements. Surrounding the internal team with experienced and trusted external business advisors in a timely fashion is another key success factor.
●Balancing competing initiatives: Most pre-IPO companies understandably are focused on managing growth and other initiatives related to their strategic objectives. Executing an IPO is a monumental task that can overwhelm key members of the management team, potentially distracting the business from these strategic initiatives.
Addressing issues such as ERP implementation, acquisitions, etc., are far more difficult for a publicly traded company that is focused on other transformation-related efforts.
●Assessing IT infrastructure and readiness: Information technology systems are the backbone of most organizations and critical to generating effective, accurate and timely financial and other reporting information. Strong IT applications and infrastructure are essential for scaling the business for expected growth, yet many companies moving toward an IPO underestimate the scope of needs for the future.
Companies that are most successful before, during and after an IPO should always — among other things — undertake several key steps to help guide them through the process effectively.
First and foremost, there must be a clear roadmap for key transformation initiatives. The roadmap should include resource and time requirements as well as executable work plans. Establishing a project management office is a key step and best practice that an organization should employ to ensure there is proper coordination throughout the execution of the IPO transformation activities.
Next, the organization should perform a thoughtful readiness assessment, which is crucial to make certain that the people, processes and technology infrastructure can capably support navigating the rigorous reporting and compliance requirements of a fast-growth public company.
It is also important to ensure that any changes to processes and systems are sustainable and scalable in a way that is consistent with the organization’s strategic objectives. Companies with long-term goals that involve broader exposure as a multinational organization must recognize this need early to avoid costly hiccups, which are exponentially greater when things are done “on the fly.”
Ironically, so many businesses rush to market in pursuit of the ideal price tag, only to look back and wish that they had undertaken more preparation before the company began answering to the closing bell on the exchange.
Companies that choose to go public will face different challenges as they continue to mature, but throughout the IPO process, they also — just as any other company — face many of the same challenges and opportunities, which are ubiquitous regardless of the name on the side of the building. Bottom line: Being unprepared can’t be an option for organizations that expect to be successful as public companies.
Steve Hobbs is a managing director in the San Francisco office of Protiviti, a global consulting company.