By Cal Hoagland
The recent series of companies filing for IPOs has revived conversation about IPO millionaires and the potential for companies going public to reap huge benefits in terms of fundraising. Many see IPOs as a highly sought-after “end game” but actually, at FLG, we know an initial public offering should really be looked at as more of a fundraising milestone. Unlike acquisitions, IPOs (while they can sometimes be a liquidation strategy for current investors) are not an exit strategy. In fact, they are more of a growth strategy, raising critical capital to fund expansion into new markets, product development, customer acquisition and other key company objectives.
What CEOs considering an IPO need also to consider, however, is the fundamental changes in the way a company has to operate as a public company vs. a private one. Executing an IPO and being public fundamentally changes the context within which a company lives, dramatically increasing company requirements for timely reporting, broader disclosure of market and company performance metrics, increased demand for data integrity, and firmer predictability of revenue and earnings forecasts. They should also know that IPOs and being public are also costly – in terms of both management time and company resources.
Going public comes with a series of trade-offs which all CEOs and boards should be fully aware of when considering going public.
Predictable Forecasts: Company Stock Price
After an IPO, a company’s stock price becomes a key indicator of company “health” and not just from a financial standpoint, from a competitive, business standpoint. Predictability of earnings and revenues becomes especially important in managing street expectations and market reactions. Analysts building models around your industry sector and competitive set don’t generally take to volatility when it comes to these two metrics. Unpredictable revenues and/or earnings can put you in the “penalty box” and many companies see sharp declines in stock price in these situations post-IPO. A recent example is the 25% plunge in Eventbrite’s stock price after they announced a change in their projected earnings and future sales outlook in Q12019. A positive trajectory in a company’s stock price can also be used strategically to help with hiring key talent, improving fundraising potential, marketing to customers and other opportunities.
Steeper Requirements for Confidentiality and Disclosures
Keeping company information confidential and managing appropriate disclosures during both the IPO offering and filing process as well as in post-IPO SEC reporting is a major new to the Company requirement for those choosing the being a public company path. Both quarterly updates and annual reporting requirements mandate that across a variety of business areas (competitive risks, performance, compensation, etc.), companies need to report accurate information and metrics. This imposes a higher hurdle for data collection and rigor and increases the frequency with which this data needs to be assembled and analyzed for internal review and external communication versus what is typically needed when a company is private.
Increased Requirements for Data Integrity and Analytic Rigor
A related issue associated with going public is the need to meet the higher standards for data integrity and accuracy which tie company performance metrics to specific company milestones. Many CFOs preparing for IPOs spend a lot of time examining company information systems to ensure that post-IPO, the company is able to accurately access data across subsystems to report out critical KPIs and metrics to outside constituencies from regulators to shareholders. The accuracy of the data included in these becomes paramount. Vendors also often use these reports to evaluate whether they want to do business with a given company. COMMUNICATION WITH KEY CONSITUENCIES
Another issue faced by public companies is the greater need for communication – with shareholders, investors, lenders, regulators and with investment analysts as a whole. Because any communications with investment analysts (who often have in-house stockbrokerage “market makers”) must also be shared broadly with the public under “fair disclosure” laws, public companies must carefully plan and deliver any information shared about company and its business performance.
Increased Need for System Integration
In private companies, if sales, accounting, compensation, CRM and forecasting systems aren’t fully integrated, this can create problems but perhaps not crippling ones. In a public company, this is a show stopper. Real time data availability and data accuracy are mandatory for valid, real time reporting of company performance. Efficient and seamless system integration across your technology stack is a must. Management must be able to access data via dashboards which integrate key performance metrics across the enterprise and use this data in their planning process to reforecast accurately and then adjust company strategy accordingly. The achievement of revenue and earnings forecasts made last quarter matter. Managers must be able to identify problems immediately and then make the operational changes to solve these so that there is minimal disruption in the external picture which has been painted for investors and Wall Street.
Proactive Structuring of Transactions
The increased burden of audits for public company financial statements requires public company CFOs to carefully plan upcoming transactions after the IPO. How a transaction is structured greatly impacts how it is recorded.. Increased scrutiny of company transactions by analysts as well as by accountants and board Audit Committees requires that a public company CFO be experienced in how to plan and execute these events.
Higher Costs Functioning as a Public Company: Time and Resource Drain
Finally, IPOs and being public are expensive. They require a lot of time and attention to data collection and review, vetting by legal and accounting teams and proactive internal scrutiny of external communications. It is critical that public-companies implement systems, processes, and controls to not have material weaknesses due to lack of financial controls, or missed mandated reporting deadlines. Audit Committees must be met with on an ongoing basis and preparation for earnings releases and calls as well as shareholder meetings and board meetings all increase demands on C-Suite players and outside consultants for a public company.
Companies in need of capital for growth and considering the IPO route should carefully examine their own capabilities to meet these higher standards for predictable revenue and earnings forecasts, better data integrity, and increased costs for additional reporting. . Proactively building these into your company’s planning and business processes, IT system roadmaps and organizational roles and responsibilities before you even consider filing for an IPO will do wonders to prevent C-suite headaches, operational fire drills and performance disappointment. If you need advice about whether an IPO is the right route for your company, or if you need help in managing the going public process, give us a call at FLG Partners.