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Establishing and Navigating the Moving Parts of an IPO

Taking a company public is a complicated process, with many moving parts. By rushing the process or putting together an inexperienced team, the likelihood of errors being made increases as does the potential for non-compliance with the SEC's regulations.
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Taking a company public is a critical step in growing and expanding a company, as it indicates the financial strength and prestige to potential investors and consumers. However, the multitude of steps required to list a company on a public equity market can be challenging if a company isn't familiar with all of the moving parts. The key to success is getting started early (about 18 months out) and establishing the below core business processes and partners that help ensure compliance and minimize costs.

Focus on Financials and Technology

It's a big decision to take a company public, given the complexities and challenges involved. Once the decision is made, pre-IPO companies are required to demonstrate an upward trend in financial performance and a strong balance sheet. Therefore, the first step for a company looking to go public is to assess its viability by establishing whether or not it has the critical mass required to be a publically traded entity.

To get started, companies should analyze their IPO readiness by comparing their financials with similar companies that have recently gone public, either in the same industry or market. This type of information is easily accessible due to the regulations in place that require public companies to file financial statements and balance sheets with the Securities and Exchange Commission (SEC), so a pre-IPO company's CFO and board members should use this data to determine whether they are "ready" to go public.

Once a company establishes that it's ready to list on an exchange, they next need to focus on installing the right technology to meet financial reporting requirements under the Sarbanes Oxley Act. Ultimately, an inadequate system could result in reporting errors down the line, which might be seen as a red flag for potential investors and regulators. To ensure the right system is in place, a pre-IPO company should align its financial and IT teams to determine what data is required for public filings and financial reports, as well as who will be responsible for managing the data going into those reports once the company goes public.

Building the Right Team

A company is only as strong as its leadership, thus assembling a strong team to guide the IPO process is essential in successfully taking a company public. When planning to go public, a pre-IPO company should line up the following key business partners:

  • Legal Counsel: Establishing a core legal team that has the experience, knowledge and wide network of resources needed to structure and navigate the moving parts involved with an IPO is imperative. When choosing a law firm, it's important that the legal resource fits the conditions and business goals of the pre-IPO company, as well as its budget. Additionally, a company's law firm does not just provide legal counsel during the IPO process - they also serve as savvy matchmakers who can connect a company with the right business partners in order to allow for a successful IPO. Hence, a company should find a law firm that has a broad network and is deeply connected to the other necessary players required in the IPO process. When taking a company public, who you know is very important, so selecting a law firm with deep connections will help position a company for IPO success.
  • Core Accounting Team: Mid-cap companies will need an SEC qualified accounting firm that is registered with the Public Company Accounting Oversight Board (PCAOB) that can adhere to the SEC established standards required to protect the interests of investors when preparing accurate and independently produced audit reports. A list of PCAOB registered firms can be found online, and companies can search based on name, city, state and category. It's important to find a "bankable" accountant or accounting firm; one that has a reputation that will help sell a company's IPO and attract investors. Companies who hire big-name accounting firms are able to leverage their association with a name brand firm, however these large firms tend to move slowly and are comparably more expensive.
  • Investment Banking: Next, pre-IPO companies should work with their legal team to find an investment banker to underwrite its IPO. Finding the right investment banker is crucial because they are responsible for structuring the entire IPO offering, submitting bids to companies on how much money they think the company will raise and helping to determine what type of securities will be issued in the IPO.
  • Investor Relations (IR) and Public Relations (PR): When a company goes public, it will have to manage two businesses - operating its company and managing the business of its public stock. Both businesses support each other and if either one of them languishes, the other business and the company's success as a whole could suffer. Thus hiring the right IR and PR firm is essential in generating awareness about the IPO in order to attract and engage potential investors, as well as strengthen the company's stock price. IR and PR firms can vary in size and expertise, so companies should do some research and select agencies that match their business objectives and goals.

Preparation and Planning Leads to Success

Taking a company public is a complicated process, with many moving parts. By rushing the process or putting together an inexperienced team, the likelihood of errors being made increases as does the potential for non-compliance with the SEC's regulations. Companies that focus on assembling the best possible financial and reporting systems, as well as experienced management teams, ahead of the IPO process will minimize costs and experience fewer distractions once the company goes public.

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