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Monday, December 14, 2015

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How to Lay the Groundwork for Your IPO


The path to an IPO can hold seemingly endless challenges for a chief financial officer. Finance leaders who have been through the process say that as CFOs drive the private-to-public transition, they need to focus on their markets, their systems and their people―including their boards.   

Have people and systems in place
Assembling a strong accounting team is an essential part of the pre-IPO groundwork. CFOs need to hire ahead, because once their firm goes public, they’ll have to manage issues like compensation and investor relations, and they’ll have no time for accounting functions.

“You really have to rely on your people…if you’re down in the weeds keeping the trains running, you’re not doing the things the board pays the CFO for,” said Peter Bardwick, CFO of document productivity firm Nitro, speaking on a panel of public company CFOs at the recent Armanino EVOLUTION Client Conference.

The corporate controller position is the most important finance role to fill when a company is readying for an IPO.  An experienced internal investor relations person and an SEC accounting manager are other key staff to bring on. “Don’t ever be afraid to over-hire into positions,” added Mike Healy, senior vice president and CFO of telecommunications firm ShoreTel. 

In addition, the finance staff needs to be ready for what lies ahead. Life at a public firm is very different, and CFOs should prepare their team for the change―for example, by helping them get comfortable with operating on a quarterly cadence.  This can help ease a transition that, for many, can be rough.  “A lot of post-IPO life is pretty unnatural for tech companies that really like to rock and roll,” Bardwick said.

Board members may also need some attention. Dan Weirich, CFO of data analytics infrastructure firm Treasure Data, said that if directors haven’t been through the IPO process before, they may not really know how the public markets work. “You need to politely educate them,” said Weirich. “I’ve had inexperienced directors calling up the research analysts…because they think that carries weight.”  

Financial systems also need to be running smoothly―optimally, far in advance of the IPO date. “Make sure you’ve got good systems ready to go, at least the financials…ideally, you’re 6 to 12 months ahead,” said Healy.

Know what costs to expect
CFOs also need to be realistic about the cost of going public, something that is often vastly underestimated. Legal fees will jump significantly because of the IPO, and audit fees will jump dramatically as well, “once you go into an SEC world,” said Noland Granberry, executive vice president and CFO of nanotechnology firm Nanosys.  

In addition to these two big cost drivers, CFOs should factor in things like the increased cost of directors and officers insurance, which can run about $250,000 a year, and the cost of outsourcing Sarbanes-Oxley work, which can add another $150,000 annually, Weirich estimated.

Internally, one big and often unexpected expense is the cost of a building out a strong management team. This can mean adding high-paying senior positions in areas such as sales and operations, for example.  Although a good management team is costly to assemble, it is crucial, because the market needs to have confidence in a company’s leadership. “As you go out to the public markets…having the right management team to drive the company and continue to make it grow and be successful is very important,” said Granberry.  

Watch your market
Throughout their IPO journey, CFOs need to be ready for unforeseen challenges. “Expect the IPO to be a lot more work than you might anticipate when you write it out on paper,” said Granberry.  The process can be all-consuming, but CFOs also need to remember to keep a close eye on the outside world.

“You’re focused entirely on what’s going to happen to your IPO, [but] you’ve got to make sure you’re looking out at what your competitors are doing,” said Healy. “Because the market can change pretty quickly on you when you’re about to launch.”

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