Thinking of an IPO in the next 2-3 years? This is what CEOs and Boards should consider today.

The excitement of the record IPO year of 2021 is still fresh, and many companies are on a holding pattern waiting for the IPO markets to fully re-open. CEOs and Boards of private companies aspiring to catch the next IPO window should use this holding period to fully prepare for the IPO process and begin running the business like a public company to achieve maximum value for their investors, founders, and employees.

The first quarter of 2024 showed signs of life in the US IPO market, providing hope of a broader rebound. The well-received offerings of Reddit and Astera Labs in March 2024 and, most recently, Rubrik’s offering are paving the way for more companies caught in the backlog. However, headwinds persist – macroeconomic, geopolitical – including the upcoming presidential election, the direction of interest rates and inflation, and unrest in the Middle East and Ukraine. Accordingly, the timing of a broader rebound for IPOs is uncertain and may not come until late 2024 and perhaps into 2025.

As a former senior partner at EY, I spent significant time leading audits of and advising high-growth companies in the U.S., Israel, and across Europe from start-up through IPO. This included seeing those organizations scale to multinational public companies. Based on those 37 years at EY, I have seen firsthand the best (and not so good) practices of going public in both a challenging IPO climate (post dot.com bubble, financial crisis, and currently) to the very welcoming markets of 2001 and 2021. This article summarizes my top five insights and recommendations to CEOs and their Boards considering an IPO event in the future.

1.    Be ready to fully execute when the market is ready.

Many companies were deep into their IPO process when the market closed towards the end of 2021 into early 2022, resulting in either a lower valuation or a postponed IPO. We have all seen IPO timelines and detailed checklists covering all the milestones and steps to complete within a 12-to-18-month period. These timelines, however, do not reflect market conditions. I have seen IPOs get chaotically accelerated by months to meet favorable market conditions. I have also seen transactions where the window abruptly closed. My advice is to start earlier than the timelines suggest or increase the urgency of preparation during this period if you are already in it.

This will allow the CEO, the Board of Directors, and Investors to be more proactive versus reactive to market conditions. If an IPO is several years away, focus on learning about the requirements for your organization, perform an IPO readiness assessment early, and prioritize the identified gaps. Give this early phase some urgency and, if necessary, get the help of advisors. The cost of preparing early and being ready is significantly less than missing out on a hot IPO market or going public while you are still building the capabilities and functions.

2.    Act like a smooth-running public company way before the IPO.

An accounting error, a missed forecast, or a late close is a “learning opportunity” when you are a private company, but it can be a potential disaster for a public company in terms of loss of market cap and trust. One of the established best practices for a strategic exit like an IPO is to make sure you have an experienced team. To ensure that such a team is in place, it is critical for the CEO and Board to put them through a test by “acting” like a public company – complete with firm, self-imposed reporting deadlines, enhanced review and controls, auditor review of financial statements and footnotes, Board /Audit Committee oversight and presentations, mock earnings call, etc. on at least a quarterly basis.

In my experience, the quality or lack thereof quickly becomes apparent. The initial quarterly financial close and forecasting efforts are typically messy, and gaps in the key competencies – tax, treasury, SEC reporting, internal controls, and financial planning & analysis – can be proactively identified and corrected.  Additionally, because the IPO process provides deep learning, the team will gain invaluable experience benefiting the company as it emerges as a public company.

3.    No surprises!

Another critical benefit of “acting” like a public company is taking action early to minimize the risk of missed forecasts or errors in financial reporting in full view of the investing public and other stakeholders. Some key actions I recommend include:

Be audited as a public company.

The auditing standards of a private company are performed under different standards than those required of a public company. Independence standards are also higher for auditors of public companies. This means that auditors must perform additional or “uplift” procedures to issue new opinions, including independence verification, for purposes of the registration statements.

CEOs should consider having their audits performed at higher auditing standards earlier than needed if there is a reasonable possibility of an IPO in the future. Otherwise, these “uplift” procedures will need to be performed during the IPO process, creating an added strain on the finance team as well as creating the risk of unexpected errors or significant delays, particularly if the prior auditor needs to be replaced, and related periods re-audited by a new firm, due to lack of independence under the higher standards.

Validate sensitive and highly technical accounting matters.

These matters should be cleared by the external audit firm’s National Office as early as possible as a preventive measure to both validate conclusions and prepare the company if questions arise during review by the SEC staff. It is common for IPOs to be delayed due to regulatory challenges of historical accounting conclusions.

A “pre-clearance” with the SEC staff on critical policy positions is possible, particularly when accounting rules were not originally written for the cutting-edge industries we have today. This proactive process can accelerate the regulator’s review and shape the disclosures to clarify positions taken.  Finding out late in the IPO process that the regulators disagree with a material accounting policy can adversely impact the offering in terms of delay and possible restatement of previously issued financial statements.

Formalize Board/Audit Committee oversight.

The audit committee and/or the Board should be given the opportunity to ask questions of management and the external auditors every quarter a year or more before going public. This not only sets a rhythm but dramatically enhances communications and accountability. It also provides an opportunity for the auditor to fully understand firsthand the board members’ concerns and risks, which can improve audit effectiveness by adding areas of audit focus while also giving the auditor a platform to share their independent concerns and observations of the company and management.

 

4.    Be the CEO.

Everyone at a high-growth emerging company is usually stretched to the limit daily. Adding the IPO process on top of that means some things must be reprioritized. A common IPO best practice is “Hiring an effective and experienced CFO,” which is sometimes ignored or delayed due to loyalty or lack of testing with the rigor of acting like a public company.

In my experience, having the right CFO at the very start of the IPO process is critical because it allows the CEO to focus on being the CEO by letting go of financial responsibilities. The CFO, with their team, must manage the registration process, the audit, establishing internal controls, the accuracy of the roadshow data, the forecasts and guidance, and becoming the main point of contact for investors, bankers, lawyers, etc.

Quite simply, the CFO must protect and buffer the CEO as much as possible so that the CEO can focus on the business operations strategy to keep the growth story while spending more time targeting and meeting with potential investors early in the process.  Having the right CFO in place from the start will ensure that the CFO becomes a trusted partner during the roadshow and shares the role as the face of the company, handling the financial details and communications.

5.    Know your growth story and path to profitability.

I always enjoyed the celebrations around the close of a successful IPO and the ringing of the bell. However, the real work and challenges are just beginning for the CEO and management team. From this point forward, everything must work – timely and accurate filings on a quarterly and annual basis, following through on the growth story promised during the IPO, and managing ever-increasing analyst and shareholder expectations on a quarter-to-quarter basis. Meeting or exceeding expectations during the first year or two of being public is particularly critical to establishing trust and confidence. I have two recommendations here:

Analyze the components of current and future expected revenues and expenses.

It is critical during the IPO process (and preferably before) to truly understand the direction of your key revenue and expense items. For example, analyze areas where efficiencies can be gained in the future, thus improving margins post-IPO.

It is also essential to focus on developing and knowing your pipeline of new customers, new initiatives, new markets, new products, service offerings, etc. Guidance must be made with confidence that it will be met based on concrete actions and expectations the company can deliver on.  This takes significant effort and advanced planning to accomplish.

Know your metrics.

As a public company, ” metrics ” tell and validate the IPO story. A SaaS company, for example, may track churn rate, monthly recurring revenue, customer acquisition costs, customer lifetime value, etc. These key metrics are typically determined during the IPO and usually late in the process.

There have been situations when the metrics created during the IPO did not support the growth story, resulting in a postponed filing. Know your key metrics that define your story as early as possible and manage and report on them internally and with Board oversight. If analysts and shareholders are using these metrics to understand your business, they must be ingrained into the company even before the IPO process begins. Also, give these metrics time to evolve and change, which is easy for a private company but challenging for a public company.

Confidently prepare your team and yourself for the next steps.

In conclusion, be ready for an IPO as early as possible so that you can get comfortable being a public company at your own pace, with the right CFO, the right team, and with the systems, processes, and board oversight that align with your long-term growth story. When markets truly open, you will be ready to jump in on your own terms, confident that you are prepared to outperform expectations.  You will also maximize the value for your investors and employees through the exit event and for the long-term value for your shareholders.

 

**Mike Portegello is a retired Partner Ernst & Young