Are You Prepared to File an IPO?

Kerie Kerstetter

An IPO is a major step in any business's life. Taking your company public can be an opportunity to generate capital for expansion and is a "transformational event for an organization" in the words of consultants and IPO experts PwC.

But preparing for an IPO can be expensive and time-consuming ' with a wealth of considerations you may not have thought of.

If this is a route you're planning to go down, is your organization fully prepared to file an IPO?

What Is an IPO?

If you're planning an initial public offering, you're probably well aware of what it involves. But for those who haven't yet investigated the IPO route, an initial public offering (IPO) is the process of offering shares of a private corporation (a firm held under private ownership) to the public in a new stock issuance.

In doing so, the business raises capital from public investors, which allows for business expansion, investment in premises, research or staff, or other capital investments to help the business develop.

Investopedia describes the IPO process as "the locomotive of capitalism. This is because throughout history, the IPO has let the investing public own a small share in many companies that have grown large and hugely successful since they first went public.'

The IPO typically rewards the company's existing investors with share premiums, and therefore offers the potential for the company's owners to profit from the investments they have made in setting up the business and nurturing it to IPO readiness.

Preparing for an IPO

This readiness, as we alluded to upfront, doesn't come easily. The amount of preparation work needed to take your organization public shouldn't be underestimated.

A guide to the process by PwC reminds businesses that "When a market window for an initial public offering (IPO) opens, it's essential...for an organization to be ready to seize the opportunity and be realistic about what is required.'

If this is a journey you're planning, you need to:

  • Understand the ramifications of moving to a publicly owned company
  • Prepare for increased scrutiny around financial reporting and corporate governance
  • Expect increased costs
  • Get your systems in order
  • Prepare for a new level of stakeholder engagement

Here, we look at what each of these stages entails, and the work you need to do at every step to ensure your business is IPO-ready.

1. Understand the Ramifications of Becoming Publicly Owned

Do you know all the implications of your planned change? Being a public company brings many new accountabilities. You will face increased filing requirements. A need for greater transparency. The need to comply with a raft of additional regulations. A range of new stakeholders, including your new investors, of course, along with an increased public profile.

It often takes a year or more for businesses to create the infrastructure, skillsets and understanding they need before taking their company public. You need to familiarize yourself with the new governance and compliance obligations you will face.

You'll have to consider your company structure. Investors may have a preference for a simple organizational structure, as complex structures can make governance more challenging ' but if you need to make structural changes, there may be tax, intellectual property and other implications to consider.

2. Prepare for Increased Scrutiny Around Financials and Compliance

A public offering shines a brighter spotlight on your corporate finances and their reporting. Getting data from all your entities in order is essential pre-IPO. Roles and responsibilities need to be clarified. Accountability for financial management and reporting needs to be transparent and non-negotiable.

Again, data management is key here. The spotlight that falls on companies pre- and post-IPO highlights the need for impeccable financial reporting.

The corporate governance and compliance requirements that come with public ownership bring obligations not just around financial transparency but a wealth of other areas. Being able to evidence a best-practice approach to governance, risk and compliance is essential. Many organizations ' whether preparing for an IPO or not ' have found compliance software invaluable here, adding rigor, consistency and audit-readiness to governance, risk and compliance management.

3. Expect Increased Costs

While we're talking about financials, it's not just reporting requirements that will grow when you're working towards an IPO. You also need to consider the costs of undertaking the move.

PwC note that "in our experience, companies tend to underestimate the costs of going public.' You will need to spend money on the filing and communication process for the IPO itself. You will face legal fees, the costs of hiring an underwriter or investment banker to help you through the process, and, after the IPO, ongoing reporting and compliance costs associated with operating as a public company.

Are your systems set up to enable you to deliver on these requirements? The more complex and decentralized your entity structure, the more it might cost to organize your data and processes to achieve your new responsibilities.

The costs involved, alongside recent concerns about under-pricing of IPOs, make cost control in advance of and during the IPO process more important than ever. Many businesses are finding that entity management software is invaluable in creating cost-efficient and effective ways to gather and report data.

4. Get Your Systems in Order

Underpinning financial, compliance, and structural issues are your systems. Complex entity structures with diverse data-gathering solutions; a lack of cohesion and consistency between departments; manual data processes ' all of these can make the work needed prior to an IPO far harder.

Before going public, you will need to demonstrate that you have the required internal controls to manage governance and compliance. Potential investors will want confidence that you have a robust corporate governance program in place, with no nasty surprises in the wings.

5. Prepare for a New Level of Stakeholder Engagement

Stakeholder management takes on a whole new meaning when you go public. The shareholder relationship is an entirely new one, and one that must be managed scrupulously.

Post-IPO, your shareholders suddenly have huge influence over your business decisions. How you will handle shareholder relationships and communications is an essential consideration for any business planning an IPO. And then of course there are your other stakeholders ' regulators, customers, employees and others. Some elements of communication will be mandated by law, whereas others will be best practice.

What does this mean in terms of reporting and communications? Are your processes and systems set up so that you can access the data you need to provide the required updates to all your stakeholders?

Ensure Your Organization Is Prepared to File an IPO

Going public might be the most exciting thing your organization has ever done. But it's not without its challenges. Take the time and put in the groundwork to make sure that you are fully prepared prior to your IPO, and your chances of success will be vastly increased.

Good governance and robust data underpin much of this success, and this is an area where growing numbers of businesses are turning to entity management software to help. If you'd like to find out more about how Diligent's entity management solutions can help you to be IPO-ready, please get in touch.

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Kerie Kerstetter
Kerie Kerstetter is a former Senior Director at Diligent and the Next Gen Board Leaders. She has done extensive work into how governance and ESG technologies empower leadership to make informed, data-driven decisions while mitigating cyber risk. Kerie was one of the founding members of Boardroom Resources, the premier educational resource for board members, acquired by Diligent in 2018.