Why CFOs Planning an IPO Must Start Preparing Now
After record-breaking US IPOs in 2021, the market cooled, and IPO numbers plummeted in 2022. For companies intending to go public, CFOs need to initiate IPO preparations early, including financial audit compliance, building quarterly reporting capabilities, and talent acquisition, where external advisors' practical experience may be crucial to a successful listing.
Editor's note:Nick Theos is a partner and managing director at UHY LLP, a national accounting and consulting firm headquartered in Farmington Hills, Michigan. The views expressed in this article are solely those of the author.
"Ecstatic"—that's one of the words commonly used to describe the memorable and historic year of 2021 in U.S. public markets. In a record year for the Nasdaq and the New York Stock Exchange, there were 1,053 initial public offerings (IPOs), but market conditions subsequently turned turbulent due to macroeconomic uncertainty, geopolitical tensions, rising inflation, and interest rates.
As valuation multiples then sharply declined, companies considering an IPO pressed the pause button or ultimately scrapped their listing plans altogether. According to Audit Analytics, only 191 IPOs were completed on the Nasdaq and NYSE in 2022. Today, headlines remain dominated by inflation, a potential recession, and recent banking turmoil, leaving many companies and investors guessing when the next IPO window will open.
Although completing an IPO is a milestone achievement, management must understand that going public is not just a one-time transaction event. The process is a transformation of the enterprise, typically involving the strengthening of existing business processes, internal controls, and infrastructure to support the additional financial reporting requirements and operational demands needed for a successful public company. To achieve a smooth transition, careful planning and IPO readiness are crucial.
The CFO's IPO To-Do List
The CFO plays a critical role in IPO preparation and will take on numerous responsibilities during the process, including developing the organization's future strategic roadmap, enabling the company to accurately forecast financial performance, and articulating the investment thesis to potential investors during the roadshow.
Organizations often underestimate the time and effort required for an IPO readiness program. The preparation process demands additional attention and time-consuming tasks.
For example, in addition to executing the process of transforming the organization into a public company while fulfilling operational duties, executives must ensure that all registration statements include audited financial statements and that the frequency of financial reporting increases from annual to quarterly.
Furthermore, all financial statements in the registration statement must comply with Regulation S-X regarding format, content, and updating requirements, and be audited in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB), which includes additional independence requirements.
If the current auditor is not a PCAOB-registered firm or has performed any services that could impair independence, the company may need to be re-audited by an independent PCAOB-registered firm. This adds further complexity and burden for companies that have not previously been audited under PCAOB standards or have not performed a full quarterly financial reporting close.
Additionally, the CFO is responsible for determining whether the organization has the necessary human capital and infrastructure to support the IPO readiness program. Given the recent scarcity of labor resources and the competitive labor market, finding qualified resources at a reasonable price and developing talent in a timely manner can be challenging.
Buying IPO Experience
It may be more efficient to "buy talent" by engaging external advisors, and this is one option CFOs can consider on the path to going public. Although external advisors may bring higher monetary costs to the organization, CFOs should seriously consider the benefits they offer in decision-making.
Nothing compares to hands-on experience. External advisors can serve as subject matter experts with extensive IPO and capital markets experience, helping CFOs and internal accounting teams navigate the additional technical requirements and expectations of a public company.
Although no one can be certain when the market will turn, companies considering going public should start the planning process now. There is no guarantee when the IPO window will open, and once it does, how long the market's acceptance of new listings will last. While external advisors may come with higher monetary costs, bringing in a team with a proven track record will provide CFOs with much-needed support and may ultimately be the key to solidifying a successful IPO readiness process.