If your company is experiencing high growth and is considering an IPO in the future, consider both the long-term growth of the company and the stringent reporting requirements demanded by the SEC before moving forward with an offering. Many private company personnel do not have the expertise and work experience needed to help a company meet these requirements in a scalable fashion. Before going through an IPO you need to develop a public company team, with the expertise and experience to meet SEC standards and Wall Street expectations.
This article introduces and explains both specific positions and general departments that a company may need to strengthen or create before going public. The list of roles and departments presented is not meant to be comprehensive but should be used as a tool to help you construct a team that is able to handle the requirements of a public company. For an analysis of the cost of hiring these people or contracting with these external entities, please see our article: “The Costs of Going Public.”
Finance and Accounting
Chief Financial Officer
Having a knowledgeable CFO with public company experience can be a game-changer. CFOs who have been with a public company, and especially those who have led a company through an IPO, will help you take all the necessary steps for a successful IPO. As your company goes through the IPO process, which can include roadshows1 and mock earnings calls2, the CFO becomes a prominent member of your executive team and stands next to your CEO in the spotlight. Additionally, having an experienced CFO is important because he or she will be held responsible for the accuracy of the financial statements. CFOs should know the common pitfalls of the industry and know how to guide your company safely through them. An experienced CFO can help your company confidently take the steps necessary to prepare personnel for an IPO.
Depending on your current situation, the finance department may require the largest investment both financially and in terms of effort. The SEC continues to demand more, in the form of statutory requirements, from public companies. For example, the commission has produced additional guidance on both leases and revenue which requires significant time and effort to understand and apply. These types of statutes affect virtually every company at some level, and ensuring that your company is compliant can be difficult.
At a general finance-department level, a company planning to go public should consider hiring people with prior public company experience. Technical accounting and SEC reporting expertise is necessary to meet the demands of public company financial reporting; this means that you need people on your team who are experts with the more complex transactions in your industry. At the present time, this means having someone on your team who understands the intricacies of the new revenue recognition standard (ASC 606). Websites like RevenueHub can aid you in applying this standard to your own company and industry.
Financial Planning and Analysis
The financial planning and analysis (FP&A) team plays a significant role in public companies. This department provides the operating budget for your company and creates revenue and expense forecasts against which performance is measured. Therefore, these financial analysts need to be experts at budgeting and forecasting.
The need for a well-established FP&A team precedes going public. While revenue growth is imperative in early growth phases and while preparing for an IPO, your ability to predict that growth is what sets you apart. When going through early rounds of funding, and later when working with underwriters to go through an IPO, revenue growth will be important. It will also be important to underwriters and investors that you can demonstrate good earnings quality. During the process of filing an S-1 and actually listing as a public company, underwriters compare your company’s performance against budgets and forecasts. Sporadic or uncertain growth will not inspire confidence in investors and could therefore hurt your valuation
.After going public, companies that miss their earnings projections are placed in a proverbial “penalty box.” Depressed stock prices and lower Wall Street valuations are typical consequences for a company in the penalty box. The FP&A team should be able to anticipate and forecast any dip in year-over-year growth or other trends and prepare the market for these changes so that your company can avoid being put in the penalty box.
As previously stated, stringent and complicated statutes require additional attention from companies looking to become public. For example, the Sarbanes-Oxley Act, which was passed in 2002, essentially makes management responsible for the financial statements of a company. The internal audit department is a watchdog for internal functions and should ensure the accuracy of the financial statements and check for compliance with laws and regulations. Depending on which exchange your company plans to list with (think New York Stock Exchange, American Stock Exchange, Nasdaq), an internal audit department may not be a requirement to become a public company; however, some stock exchanges (e.g., Nasdaq) do require it. Be familiar with the requirements of the stock exchange you plan to list with to be sure your company is compliant. Although it is not required in every situation, having an internal audit function is always beneficial in the long run. A well-established internal audit team can help to ensure accuracy and integrity in your company.
Board of Directors
Public companies are required to have a board of directors that complies with both SEC guidelines and any stock exchange with which the company is listed. The majority of board members need to be from outside the company and independent from it in fact and appearance. Initially, you may not have issues with a board that has limited independence; however, over time this could draw increased external scrutiny and limit the functionality of board members.
The audit committee is responsible for overseeing financial reporting, selecting the audit firm, and handling the results of the audit. The committee also offers recommendations to the board of directors regarding internal controls, financial reporting, and both internal and external audits. All the directors in this committee should be independent, and at least one director must be an audit committee financial expert3. Be sure that you are familiar with the exact independence requirements for these committee members and the qualifications necessary to be considered an audit committee financial expert.
Chief Compliance Officer
The Chief Compliance Officer (CCO) is a fast developing position an increasing amount of public companies are making use of. The CCO should ensure that the company and its employees are compliant with regulation. He or she should also ensure that the company develops and adheres to a strong code of ethics. The exact role your Chief Compliance Officer plays will vary greatly depending on the norms and the level of regulation in your industry. The role of the CCO is occasionally filled by the general counsel. Being public earns your company more attention and, as such, having a qualified CCO—whether in the form of general counsel or otherwise—is imperative.
Legal - Internal
The general counsel—the chief lawyer at the company or head of the legal department—does not necessarily need to have experience helping a company go through an IPO. However, many of the most qualified general counsels have had this experience. If a general counsel has gone through an IPO before they are more prepared to handle the complexities that can arise. Assembling an external team with IPO experience is generally just as important as having an experienced general counsel.
Investment Banker / Underwriter
The investment bank you choose needs to have experience helping companies through the IPO process. While going through the process to become a public company, you will work primarily with one investment bank. The bank that serves as your primary contact assembles a syndicate of investment banks to get you through an IPO.
The investment bank’s main role is to sell your stock to investors. To accomplish this, they also help value or price the stock, coordinate the roadshow, and even help with the timing of the actual listing.
Some companies enter the public arena through less conventional means (private placement, reverse merger, etc.). For more information on these alternative options, see our article “Alternatives to an IPO.” Even if a company decides that it would like to use an alternative method to go public, an underwriter and their expertise is often invaluable. Most companies that go public, whether through an IPO or an alternative method, require the help of an underwriter. Underwriters specialize in helping companies navigate the complexities of going public and can help to limit or completely avoid costly mistakes.
Capital Markets Advisor
A capital markets advisor is an independent entity that assists companies with their decision-making process through all stages of an IPO. A capital markets advisor in no way replaces an underwriter, nor does an underwriter replace a capital markets advisor. In fact, a capital markets advisor is typically brought on before an underwriter and helps a company select the correct underwriter for its particular needs. An advisor helps prepare the story that is shared with potential investors during the roadshow. This advisor also helps manage investor expectations for the company and its growth.
Once you have selected an underwriter, a capital markets advisor will serve as a sounding board for other decisions. They help to mitigate potential conflicts between the various underwriters and encourage them to work toward the same goal. A good capital markets advisor will smooth the process of your IPO. Timing, marketing, pricing, and allocation all fall under the umbrella of an advisor’s responsibilities.
The need for an independent auditor exists even before IPO preparation is necessary. When assessing independence, you need to either find and contract with an independent auditing firm or reevaluate the relationship with your current auditing firm to ascertain its independence. Independence in this context simply means there cannot be any conflicts of interest. An example of a conflict of interest would be if the firm that audits you also designs your accounting systems or provides you with transactional accounting advisory services.
Timing is important when hiring an auditor. In order to go through a conventional IPO you usually need to provide three years of audited financial statements—exceptions to this rule exist under the JOBS Act: see “The JOBS Act,” which details these exceptions. You will not want to wait until crunch time to have these audits performed, as issues may (and usually do) arise that require significant time and effort to resolve. You want to contract with an audit firm that has experience with IPOs and public company financial reporting. For more information on preparing for these type of audits, see the article: “Audit Prep for the Big Leagues.”
Advisory accountants provide both transactional support and advisory services. Transactional support means ensuring that the more complicated transactions for your company and industry are recorded in accordance with US Generally Accepted Accounting Principles (GAAP). Because this firm is not restricted in independence like an auditing firm, it can also offer strategic advice and help you streamline your accounting systems going forward. Having an advisory accountant on your team is not absolutely necessary, depending on the complexity of your business and industry, but many companies find that an advisory accountant’s expertise is irreplaceable.
A financial printer is a printing company that specializes in printing products like prospectuses4, stock certificates, warrants, etc. While standard printers may be cheaper, financial printers have experience printing for companies going through IPOs. This means that financial printers are accustomed to working under tight deadlines and have had experience adapting and customizing on the fly. Additionally, financial printers are already familiar with, and have staked their business on, their ability to comply with strict security protocols. Standard print companies do not have this same background and training.
Legal Counsel - External
Although using internal counsel to handle legal issues is cheaper and more cost-effective, it is not easily sustainable through high growth. As your company grows, your legal team will generally not be able to handle all legal issues that emerge from the expanding business. In order to be more efficient, you should identify your most pressing and recurring legal needs and then staff your internal legal team with people who know these issues and can handle them well. For issues outside the scope of your internal team, you should identify and utilize law firms with expertise in those particular issues and your specific industry. This is especially true of an IPO. Many complex laws exist in conjunction with filing an S-15 and going through the IPO process. Completing an IPO would be virtually impossible without hiring a firm with the expertise to successfully navigate these laws.
When experiencing high growth or going through an IPO, having a team with the right level of experience is necessary. If your company is considering going public in the future, plan ahead and know who you need to hire and which partners you need to bring on board to be successful.
- Deloitte, “The Changing Role of Internal Audit”
- Investopedia, “Internal Audit”
- Investopedia, “Prospectus”
- PWC, “Roadmap for an IPO”
- SEC, Request for Comment: Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002
- US Analytics, “Planning to Go Public? The Critical Role of Finance & Accounting”
- Roadshows: These are meetings where management from your company (CFO, CEO, VP of Finance) and your underwriters—discussed below—go to different cities and talk to current or new investors and introduce the company.
- Mock Earnings Calls: This is a common practice used to test drive the earnings release process. For a public company, earnings calls serve as the medium through which the company can discuss its financial statements for the period. These usually happen either simultaneously with or directly after the press release detailing these earnings.
- Audit Committee Financial Expert: According to the SEC, this director must understand US Generally Accepted Accounting Principles (US GAAP) and financial statements, understand the oversight role of the audit committee, and have the ability to ask appropriate questions to ensure the completeness and accuracy of financial statements.
- Prospectus: A document required by the SEC that provides details about the investment to the public.
- S-1: The form a company files to list its shares on a stock exchange.