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Wednesday, February 1, 2017

10 Tips for a Successful IPO or M&A


Whether you are targeting an initial public offering (IPO), a sale or another round of funding, you need to have your financial house in order before the due diligence process begins. At the recent Armanino EVOLUTION conference, a panel of experts with venture capital, buy-side and sell-side experience discussed what companies need to do to prepare themselves for growth. Here are some of their insights.

Investors and buyers want to see smart growth. There is still a lot of capital out there, but the bar is higher than it was 12 to 18 months ago. These days, companies seeking funding or looking for a buyer need to have a plan to break even, with defensible numbers. Although there are still hyper-growth companies that get funded quickly, the market’s mentality is no longer “growth at all costs.”

Start acting like a public company before your IPO. To function as a publicly traded company, you must be able to close the books in five to seven days, provide solid quarterly financials and prepare rolling forecasts for analysts. Assess the changes you need to make to your people, processes and accounting systems to do this, and then lay out a plan to achieve these capabilities before you go public. It’s not premature to begin your preparations 18 months ahead of your target date. If you are unsure of your IPO timing, it’s still better to start the process early, because you don’t want to be caught flat-footed by a call from your board saying that you’re going public in 60 days. That kind of chaos is very hard on your team and is very expensive.

Remember that the IPO is not your final goal. It is just the beginning of your life as a public company. From a finance and accounting standpoint, life gets much harder after your IPO. For example, within a few weeks of going public, you’ll have to do your first 10-Q filing.

Choose the right tax provision partner. When you are a public company, you will need a much more robust and efficient tax provision process, and your auditor will probably not be doing your tax work. Tax provision is one of the most important areas of the audit, so you should select a tax advisor who can work well with your audit team. A good relationship with your audit firm, on the tax side, is invaluable; a bad relationship can be a nightmare.

Provide audited/GAAP financials. For an IPO, investors want to see annual audits going back two to three years. For mergers and acquisitions (M&A), audited financial statements are optimal, but at the very least, your financials should be prepared in accordance with GAAP. This compliance is particularly important for software companies, because non-GAAP revenue recognition policies are one of the biggest red flags for potential buyers.

Mitigate tax uncertainties. We often see investment bankers getting nervous about tax disclosures. You will have to disclose any tax uncertainties in your 10-K, so you need to know what those are. For example, you can amortize goodwill as a private company, but you can’t when you go public. You also need to know your property and sales tax liabilities, which are often overlooked. IPO or acquisition negotiations are not the time to discover that you have nexus in another state and owe a big tax bill.

Evaluate your NOLs. Because an IPO is an ownership change, it will trigger Section 383 of the tax code, which limits your use of net operating losses (NOLs). So you must ensure that your NOLs are properly valued.

Have clear proof of IP ownership. This is another potential deal-breaker for acquirers or investors, who want to see that your intellectual property (IP) is clearly traceable and owned by your company.

After you file your S-1, make as few amendments as possible. Each amendment can push back your timeline and make investors nervous. Once you are public, you also become a target for activist investors, who will comb through your filings to try to find an opportunity for litigation.

Keep your people motivated. Although it is often overlooked, employee retention can be a big problem during an acquisition, particularly in cases where the deal is unexpected. To avoid losing key people before and after the transaction closes, you need to have incentives in place, such as success bonuses and stock options. Employees are also looking for leadership during this stressful time, so the CFO needs to continue to manage direct operations and motivate the team.

Whatever your goal is, these best practices will help you avoid deal-breaking surprises and better position yourself for a successful transaction.

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