Preparing for an IPO? Make Your Finance and Accounting Organization Stronger First
Capital markets activity is on the rise, as the initial shock of the coronavirus pandemic has begun to wear off and management teams consider what the next stage of growth looks like for their businesses. From traditional initial public offerings (IPO) to special purpose acquisition companies (SPAC) and other capital markets vehicles, companies are learning how to maneuver today’s unprecedented landscape with virtual roadshows and other unique solutions that make access to capital possible. While it remains to be seen how the upcoming presidential elections will impact capital markets activity, as investors rush to complete transactions and higher valuations in certain industries create lucrative exit opportunities, one thing is certain: the market is currently ripe for those considering going public.
By focusing on strengthening core accounting and finance functions, companies can prepare for a successful transaction when the right timing strikes, while cultivating a strong and more efficient business in the process.
Although a company may not have current plans to go public, this rapidly shifting landscape can be a gamechanger. The spike in capital markets activity has prompted many SPAC sponsors to proactively approach companies that may not have otherwise contemplated an IPO. For companies considering gaining access to capital through a capital markets transaction, ensuring their finance and accounting organizations are running smoothly is critical to successfully navigating potential investment or exit opportunities when they arise.
Perhaps the most effective way to understand organizational gaps and strengthen a company’s finance and accounting function is through an IPO readiness assessment. Generally, readiness assessments should be completed 12 to 24 months prior to the anticipated transaction to give management ample time to process the results and implement any necessary solutions. Readiness assessments typically include a comprehensive review of the company’s functional areas, ranking gaps according to the level of effort and length of time to address that gap.
While the identified gaps from the readiness assessment can be numerous and overwhelming, companies should focus on the areas that can best optimize their finance operations. Here are three areas to prioritize when undertaking this analysis.
Streamline and accelerate the close process
A streamlined and accelerated record-to-report cycle will result in better visibility of performance and ultimately enable better business decisions. Despite this benefit, many private companies struggle to close their books in a timely manner, which is often the result of informal manual processes, insufficient resources, and system challenges. While some challenges may be too costly or time-consuming to implement and may be more pressing as the plan to go public crystalizes, companies can take certain actions that will yield significant improvements in the efficiency of the close cycle.
For example, establishing a structured financial statement close calendar will help define clear roles and responsibilities for each task, eliminating duplication and rework, and accelerate the close by sequencing activities, moving some of them to pre-close period (e.g. cut-off for accruals, fixed asset ledger close). As the company continues to cement its plans to go public, the checklist can expand to include any associated external reporting activities, such as detailed footnotes, management’s discussion and analysis, and other required annual or interim disclosures.
Other steps that can significantly improve record-to-report cycles are standardizing and automating journal entries and account reconciliation processes. Management can reduce its number of manual journal entries and automate account reconciliations by either leveraging unused capabilities of its existing ERP or investing in a software solution, such as FloQast or Blackline. Establishing documentation processes with evidence of review and approval will also set the foundation for a strong internal control environment, which will be necessary once the company becomes public.
Establish GAAP basis quarterly financial reporting process
Since private companies generally only report GAAP basis financial information annually, their monthly and quarterly close activities are often less comprehensive than at year end. Although it may be appropriate to continue a “soft close” for monthly reporting, getting into the organizational routine of preparing GAAP basis quarterly financial statements will save time down the road during the IPO and post-IPO process, when comparative prior quarter-to-date and year-to-date periods will be required for 10-Qs and for external auditor reviews. Although current SEC rules allow omitting quarterly information in pre-effective Form S-1 registration statements, investment banks often prefer to present quarterly information for companies experiencing recent success. Even if a company chooses to go down the private transaction route as opposed to a public exit, having GAAP basis quarterly financial statements will be beneficial during the due diligence process for a private transaction.
Improve processes by focusing on internal controls
Many privately held companies lack the resources and discipline needed to maintain clearly documented accounting and financial reporting policies and processes. This deficiency often leads to inconsistent processes across different locations, segments, or functional groups, potentially resulting in material misstatements due to incomplete or erroneous data. While conducting a full Sarbanes-Oxley risk assessment and control design may be an endeavor that makes sense to pursue once IPO plans are certain, documenting and adhering to general accounting and financial reporting policies and processes will be beneficial to all companies.
Since this may still seem like a daunting task, companies can address the most impactful areas to start. For example, focusing on the order-to-cash (O2C) process, including implementing incremental steps to increase invoicing efficiency and collections, can not only improve consistency and controls in the O2C process, but can also improve a company’s cash position. Going through the IPO process with sufficient cash on hand and demonstrating to investors that IPO proceeds, or newly established debt facilities, will provide resources to fund future growth, will be favorably viewed by investors and could be a tailwind for higher valuations. Investing in process improvement and formalizing key processes like O2C can help position a privately held company for a healthier financial reporting environment.
While capital markets activity has recently spiked in certain industries, undergoing a private transaction or IPO is still an enormous undertaking. By focusing on strengthening core accounting and finance functions, companies can prepare for a successful transaction when the right timing strikes, while cultivating a strong and more efficient business in the process.