By Chris Lowe
Every chief financial officer preparing his or her company for an IPO is focused on a key overarching goal – access to public market capital. But at FLG Partners, we know that more experienced CFOs understand the need for much more proactive planning for a public offering if they want their IPO to be strategic and successful. And importantly, this often means paring back, not adding to, CFO checklists and “to do” lists.
We distill this down to three essential pre-IPO bullseyes:
- Set the right objectives
- Understand all operating impacts
- Time governance moves carefully
Set Correct IPO Objectives and Expectations
Increasing company access to capital is not a goal in and of itself because increased capital will always ultimately get deployed. It is the end use of that capital which is the objective, value creation for the enterprise. When a company team decides to go public, it is essential that all parties involved have an accurate and common understanding of what that strategic move will do to fundamentally change the competitive landscape, reduce cost, expand access to resources or otherwise add value to the going concern. That means the management team, board, outside investors, bankers, lawyers, accountants and IR folks.
Going public should always be a strategy which is pursued from a position of strength in the market so that value enhancement is leveraged. At FLG, we have seen companies attempt an IPO not to achieve this goal (value creation) but when their ability to raise private capital and remain private becomes so constrained that reaching out to the public markets seems like the only option, especially for private investors who are looking for a liquidity solution. An experienced public-company CFO will always ask themselves “Why am I putting my company into the hands of a new set of investors?” and be able to substantiate his or her rationale. And CFOs shouldn’t kid themselves. Investment bankers and public investors these days are just as tough as private investors in judging risk/reward relationships and asking the tough questions about value creation. Be warned.
Face IPO Operational Realities
Every company approaching an IPO is in a unique situation. Different product opportunity. Different customer targets. Different capital/CAPEX structure. Some ventures are “one trick ponies” such as what you typically see in emerging life science companies, while others are brands with extensible business models and broader opportunity in terms of category reach. As a CFO prepares for an IPO, they need to be crystal clear about what they are and what an IPO can achieve in their own specific company circumstances. These considerations weigh directly on the risk/reward tradeoff for investors.
In addition, CFOs must understand that going public inflicts new operational burdens on the enterprise; regulatory scrutiny, required quarterly earnings releases, improved forecasting acumen, increased SEC scrutiny, new reporting requirements etc. The typical IPO “checklist” will have 300-400 actions which need to occur before the offering. The experienced CFO knows how to keep teams focused on doing their job. Boards can often get myopic and more conservative in such situations, fearing that strategic moves such as partnerships and joint-development agreements, for example, may distract a management team trying to absorb all the new responsibilities of being a public company. This is the exact opposite of what the IPO was intended to produce in terms of company behavior. Stay on plan.
Make Governance Moves At the Right Time
Many CFOs preparing for an IPO immediately start preparing their own IPO checklist of “to do’s” to lay the foundation for governance as a public entity. We strongly counsel against this. Most of these moves can be deferred until it is clear that a company’s value-creation story will be well received by the market and the IPO will be a successful one. Seasoned CFO’s know the true gating items for an IPO and can easily respond to investor and management concerns about when to address lower priority requirements around public company governance.
This is important in terms of investment spending as well. Directors and Owners Insurance policies for many companies now cost in excess of $1-1.5 million per year with legal fees, filings adding to this by another $1+ million annually. From drafting S-1s to auditing quarterly financials, finding independent directors for your Audit Committee Chair, beginning to launch the Investor Relations assault, much of this can take a back seat until it is clear how the market will value your transaction.
Finally, effective public company CFOs must be able to effectively triangulate the potentially diverse points of view of Board investors, public markets and the CEO and management team about the IPO’s perceived value. His or her objective should be to help facilitate their conversation, balance expectations and create common understanding and set reasonable, evidence-based values for risk/reward tradeoffs.
If you are moving your company strategically toward IPO territory and need consulting assistance, make sure to contact us at FLG.