But despite lingering uncertainty regarding the economic outlook, short-term market events typically should not impact the process companies undertake to prepare for an IPO. Companies that successfully execute an IPO in the coming months will have taken a long-term approach and undergone careful planning, thereby preparing them to navigate unforeseen market events.
Potential issuers often underestimate the time and effort that goes into embarking on life as a public entity. No one can predict when the window will open or shut. But companies that are well-prepared will have the flexibility to take advantage of market conditions and be able to access the IPO market when the timing is right.
So what is a company to do?
Market Volatility is Nothing New. Though recent high volatility causes heartburn for issuers and investors, the market has experienced similar levels of volatility over the past decade, including the spike caused by the credit crisis in October 2008. The adage of history repeating itself seems apt, and is a reason to not panic.
Fundamentals — the IPO Building Blocks. Investors consider IPO issuers to be relatively high risk due to the lack of trading history; increased market volatility compounds that risk. It can be a major factor contributing to an investor deciding to not invest in the IPO.
In turn, investors have demanded more information from companies pursuing IPOs, creating pressure for companies to develop their business models and focus on fundamentals.
Investors will often look to key metrics, including revenue growth, profitability or a clear path to profitability, relatively predictable earnings growth, a large addressable market, barriers to entry, protectable innovation and an experienced management team.
Companies with good fundamentals and sound oversight are more likely to execute a successful IPO in a difficult capital-raising environment.
Be Ready. An IPO is a transformational event, perhaps the most important a company can undertake. It can change the lives and fortunes of its owners, investors and employees. Without smart planning and preparation, an IPO can be problematic from the start.
One way to ensure a successful IPO is to establish two equally important parallel work streams at the start of the registration process, preceded by a thorough IPO readiness assessment. The two work streams are called “Going Public” and “Being Public.”
Going Public is the process of taking the company through the steps of gathering the necessary financial, marketing and business information; determining the optimal tax and legal structure; filing the registration statement with the U.S. Securities and Exchange Commission; responding to SEC comments; marketing the business and selling shares in the road show. The registration process ends when the offering is sold and the company and/or its shareholders receive the proceeds.
Being Public is the process of transforming the organization so that it can operate as a public company. Among the many tasks involved are upgrading, sustaining or enhancing financial reporting capabilities; creating an investor relations function to communicate with the street and investors; meeting the governance, reporting and internal controls standards; and listing requirements of the SEC and of the selected exchange.
Preparing Early — IPO Readiness Assessment
Though some of these elements will not come into play until after the IPO launch, many have long lead times. Thus, it is critical that companies establish a process to identify essential action items, create an achievable plan for completion and commence execution while still a private company. With early preparation, companies avoid public scrutiny as they undertake decisive actions for the first time.
In the preparation stage, an IPO-readiness assessment can be useful to identify big-picture issues and prevent an embarrassing deal killer or surprises late in the process. The right amount of preparation also helps establish a timetable based on the offering’s strategic objectives, specific business issues and the actual work that needs to be performed. Such an assessment provides a reasonable basis for discussions with stakeholders about timing.
The IPO readiness assessment also identifies gaps within the new processes, areas needing internal controls and positions requiring enhanced technical accounting skills to operate as a publicly traded company. It becomes a starting point.
Lastly, companies planning an IPO must remember: this isn’t a sprint to the finish line to get the deal done. An IPO is more like a marathon — a long-term process and transformational event.
Mike Gould, a Transaction Services partner with PwC’s Capital Markets and Accounting Advisory team, advises companies on IPO preparation and execution.
This article first appeared in Financial Executive magazine.