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So you’ve decided to take your company through an IPO. What do you do now to ensure your IPO readiness?
Before you scramble to begin the IPO preparation process—finding the necessary documents, setting a budget, and more—it’s wise to take a step back and determine whether going public is even the right path.
An IPO, or initial public offering, is the process of transitioning a business from a private company to a public company by offering its stock on a public equity index or secondary market. Once public, the listed company can raise capital from public investors.
Moving forward with an IPO typically means you can raise more capital and command better terms when borrowing funds— two very appealing prospects for growing your business. However, IPOs can also be risky, costly, and time-consuming.
Between underwriting, legal, accounting, Security and Exchange Commission (SEC) registration, and other IPO readiness costs, you may need to spend hundreds of thousands to several million dollars depending on your industry and many other factors. The timeline for going public is also lengthy—expect it to take at least 12 to 18 months.
More than a few companies have experienced failed or less-than-ideal IPOs, often due to over-estimated valuations or through SPAC mergers. Take well-known brands such as WeWork and Clover Health, for example. Clover Health went public in January 2021 through a merger with Social Capital Hedosophia Holdings Corp. III, and is now trading 50% below its initial asking price. WeWork initially intended to go public through an IPO but wound up going public through an SPAC merger after internal issues surrounding leadership, corporate structure, and losses derailed their initial IPO attempt.
Even if your business isn’t on the level of Uber and WeWork—when they went public, they were valued at $84 billion and $9 billion, respectively—these anecdotes serve as reminders that an IPO isn’t always the right path.
Still, an IPO could be in the cards for your company. So if you’re looking to develop your IPO readiness roadmap, be sure you have clear answers to the below questions.
Consider the key performance indicators (KPIs) you’re currently using to measure your performance. Do they align with your competitors or companies similar to your own? If not, you’ll need to reconcile these with the KPIs public investors will expect—they want to be able to easily compare your company’s performance and audited financials to others in your industry.
One aspect of IPO readiness that companies often overlook is vetting leadership’s current and historical online presence, especially the CEO. C-level leaders are usually highly visible figures, and their remarks can often shape the perception of the whole company. That’s why it’s critical to review and scrub what they’ve published online on social media and other platforms. One misconstrued tweet or post from the management team could cause reputational and financial harm for the business during the transition.
The SEC requires companies to report operating segments separately in public documents. Management is required to provide disclosures of financial performance based on how the key decision makers manage business units. If you have multiple business units, you may be required to provide financial performance for each business unit or aggregated business units if businesses have similar operating characteristics.
Segment reporting is often scrutinized by the SEC. It can also allow competitors visibility into your company’s structure and potential problem areas from an executive’s perspective.
Every public company must have a board of directors that is independent, competent, and complies with SEC requirements and stock exchange rules. Board representation is often scrutinized by shareholder rights groups and institutional investors. Most boards consist of at least five members, and there are laws in certain states that dictate the diversity of the board members, such as how many must be female.
Your financial reporting must comply with Sarbanes-Oxley within one year of your IPO or sooner if you are a large, accelerated filer. Building an appropriate internal control framework compliant with Sarbanes-Oxley is one of the major obstacles to maintaining SEC-compliant financial statements. Internal controls must be designed, documented, and tested on a recurring basis. Independent auditors are required to test not only the appropriateness of the financial statements that are included in SEC filings, but also on the status of the internal control environment.
Significant deficiencies in your internal controls can potentially delay the IPO, if not mitigated. And material weaknesses in your internal controls may derail the IPO process completely. As such, the SEC requires management to report material weaknesses in the financial statements, but this may cause investors to discount the company due to internal control issues.
It’s important to begin to build an internal control environment as you grow, rather than scrambling to put an internal control environment in place to meet the SEC requirements.
If you’re not ready for an IPO yet, you can make it a future goal. In the meantime, stay on top of your finances with Zeni, a team-based, AI-powered finance concierge. We combine cutting-edge technology with professional human expertise to help you overcome common startup accounting and bookkeeping problems. In addition, Zeni optimizes your accounting systems, so you always have access to the most accurate, up-to-date information about your company’s finances—and you can make informed decisions in less time.
Schedule a personalized, live demo of Zeni to see how we can help you maintain an insightful, full-picture view of your startup’s financial position.