Armanino Blog

Tech Roundtable Insights: Preparing for an IPO

by John Dunican
The transition from private to public company is a huge leap with little room for error. At a recent Armanino roundtable, experts from Armanino, Nasdaq, and leading venture capital and law firms talked with finance leaders about the steps needed for success on and after IPO day. Here are some of their insights on how to prepare your infrastructure, your culture and your message.

Consistency is critical

Finance teams at growth companies are used to thinking about their two-year, three-year or four-year plan. But as a public company, you also have to focus on the short term and maintain a quarterly reporting cadence, with accurate and consistent forecasts. You need to build an infrastructure―including people, processes and technology―that enables you to operate like a public company before you go public. 

If you don’t have this internal engine, you risk missing forecasts, and here the public markets are much harsher than private boards. The buy side is indifferent about why you make a mistake. Although you may have a good explanation, the market is unlikely to discount the miss and look at the long term. The reality is that they are incapable of doing that because of the way a lot of public funds are set up.  

Your stock can drop 50% in a week if it underperforms. This can lead to issues around restricted stock units (RSUs) and employee retention, which can distract your management team at a crucial time. Even overperforming versus estimates is a problem, because then the market will have whispered expectations that you have no control over.  

If your business has subscription-based revenue, the new ASC 606 revenue recognition rules will make infrastructure even more critical. The new rules will put more pressure on the need, at an operations level, to be able to forecast what you are going to do and meet expectations. Finance teams will have to understand exactly how their selling organization works and what they do in each quarter, then communicate this clearly to the markets, so that there are no surprises. 

Build systems and processes

From a technology standpoint, an IPO-ready infrastructure typically includes enterprise resource planning (ERP), customer relationship management (CRM), budgeting and forecasting, and equity management systems. Tom Mescall, head of Armanino’s Consulting practice, said that your technology needs to support these five things:
  • Automation of manual processes
  • Collaboration between systems/plans, to ensure forecast accuracy and provide insights company-wide
  • Automated controls (as many as possible)
  • Global scalability and the enforcement of standard processes.
  • Integration for all of your cloud applications
To be effective, your systems must also be paired with strong processes and controls. You won’t be able to achieve results with a revenue recognition tool, for example, if you don’t also build processes that are based on a thorough understanding of how ASC 606 impacts your business. 

To optimize your technology efforts, it’s a good idea to designate one stakeholder, internal or external, as the “owner” of the system. This dedicated person can oversee the building of processes and controls, and make sure that you leverage all of the system’s functionality.  

Allow time for process improvements

Designing processes and controls that support accurate financial reporting is relatively simple. What’s not so simple is getting people to consistently follow those new processes and controls. Convincing your software engineers to change their work patterns can be a tough shift, for example, and it requires hand-holding and time. What you don’t want is to be changing processes right before, during or right after your IPO. 

As a general rule of thumb, you should plan to start the design of controls at least four quarters prior to an IPO.  Assess where you are now and where you have to be, then allow enough time to get people to that point where you’re operating like a public company, with predictable results prior to the year of your second 10K.  
Address the key high-risk areas first, get people thinking about processes the right way, and allow them time to change as you transition into an effective model.  Starting the process and getting financial controls ready early also allows your team to have their primary focus on many other IPO requirements in the six months leading up to an event.

Vet your board early

From a corporate governance standpoint, one area that is frequently ignored in the run-up to the IPO is the makeup of the board.  Companies often mistakenly assume that current directors want to stay on, or they overlook independence issues that could disqualify them.  

You need to have conversations with your board members to confirm their post-IPO plans, and you should allow plenty of time for conducting an independence analysis and making any necessary replacements. You don’t want to surprise the market by suddenly announcing board changes right before or after you go public.

Shift your culture 

Another critical component of IPO preparation is the culture change that needs to take place company-wide. Once you pick your investment bank, your paradigm shifts, and you can no longer operate as a free-wheeling private company. 

This means you might have to suddenly tell your CEO to please stop talking about how much money the company is going to make with access to the public markets. The challenge is this cultural shift, where you have to think like a public company before you go public, because the SEC is going to want you to act like one. 

The whole company may be used to getting regular business updates from the CEO, for example, or everyone may be able to access financial data―information that could be used for insider trading. So you may need to restructure the way management interacts with employees, or limit access to certain shared drives. From a general security standpoint, you’ll likely need to give up some agility and collaboration in order to protect your critical assets, whether that means securing your back office systems or restricting entry to your physical office space.

The key to a successful culture shift is communicating to your workforce about why the change is necessary, why it benefits them, and what the rules are. Educate people about your insider trading policy and the nuts and bolts of your equity plan, so that they understand what they have and know how the IPO is going to impact them. Employees don’t want to be blacked out, they want to be able to vest in those RSUs and sell. 

Create a messaging strategy

If you don’t handle your pre-IPO communications carefully, you can run afoul of regulators. To avoid this, you need to build a communications cadence and a defensibility to the SEC, said Jeff Thomas, head of Nasdaq’s Western Region listings.

Get your management team and investor relations people in the room and plan a strategy for the next six to 10 months, including conferences you’re attending, press releases, product launches, etc.  If you’re going to bring on a new board member, for example, send out the press release well before you go public, so it doesn’t seem like you’re trying to create hype during the IPO. 

Focus your messaging on what you do as a business, rather than your future growth projections. Put together a process list for management to follow, then get management and the legal and finance teams to make sure that the rest of your employees are careful, as well. For example, put social media processes in place, so people stop tweeting about anything that might be related to the IPO. 

Making an effort to play by the rules will carry weight with the SEC if someone in your company does make a mistake and say the wrong thing.  “The best defense is that you tried and did due diligence and put processes in place,” said Thomas.  

When IPO day arrives, you can maximize your marketing efforts by targeting your employees and customers, not just investors.  For customers, this can be something as simple as inviting your 10 biggest clients to help you ring the opening bell. When it comes to your workforce, you should let everyone know that the IPO is just the beginning and thank them for their hard work―for example, by webcasting a personal message from the CEO.

Employees are a critical part of a company’s growth strategy, so you need to set the tone for your future success. “Getting that messaging right on day one is really key,” said Thomas. “You don’t want them thinking ahead to day 181, when they want to cash out and leave.”

January 19, 2018

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John Dunican - Partner, Consulting - San Ramon CA | Armanino
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