IPO Readiness: A 5-Step Public Preparedness Checklist

Companies considering a public offering should begin to prepare now to capitalize on opportunity windows that present themselves later.

By Shauna Watson and Patrick Hanraty

“By failing to prepare, you are preparing to fail.” The adage has been credited to Benjamin Franklin, and while it’s unlikely he was talking about IPO readiness, the quote is nevertheless extremely appropriate to that process — especially given the current market context.

And that context is complicated. To say the 2022 IPO marketplace has cooled would be an understatement. According to data from EY and Dealogic, in 2021, U.S.-listed companies raised over $155 billion through IPOs. In the first half of 2022, they raised a paltry $4.8 billion. What’s behind the boom-to-bust storyline? It’s pre-recessionary risk aversion combined with high inflation and rising interest rates. While exceptions exist, now hardly seems like the safest or most lucrative time for most private, private equity-backed companies to go public.

When will the tide turn? Given a volatile economy and a complex geo-political environment, it is hard to say. But, because fortunes (and economies) can turn on a dime, it would be wise to heed Mr. Franklin’s advice to prepare. This is especially true for those private companies that have already publicly signaled their intent to go public via an S-1 filing, and those considering it as an option.

Private equity-backed companies, whether they have filed or not, should do the hard work of IPO readiness now, be prepared to capitalize on any opportunity windows that present themselves later, and be ready to thrive as a publicly traded company. What does that readiness look like? Our public preparedness checklist can help guide the way.

Step 1: Develop a Roadmap for the IPO Runway

Start with an assessment of the company’s current state for operating successfully as a public company. Critical to this process will be the realistic identification of any gaps to be addressed before launching the IPO. This assessment will allow private equity-backed companies to build an IPO roadmap, prioritizing upgrades that will add value to the business regardless of whether the company becomes public or simply continues to scale.

Step 2: Get a Head Start on Your PCAOB Audits

Critical to the registration process is upgrading your audits to PCAOB audit standards — or doing them for the first time. You’ll need at least two years of financial statements, possibly three years, and likely eight quarters as well. This process often takes the longest of all the workstreams. Securing a reputable and independent audit firm and completing the required audits and reviews can take 2-6 months or even longer, depending on the company’s preparedness.

Having adequate staffing, strong controls, documented technical accounting positions, and a hard close each period will accelerate that process. Addressing control issues early, such as balance sheet reconciliations, IT controls, accounting for complex transactions, and review/approval of journal entries can help the company avoid the dreaded material weakness and give investors confidence in the controls around the integrity of the accounting records.

Step 3: Articulate the Story

Here we are referring to the company’s equity growth story. Critical to telling this story will be answering questions relative to previous growth, current performance, and future scaling efforts. How big is the market opportunity and what has your penetration been? Will organic growth be enough? Does the business have a weak-link unit weighing down performance or diverting management attention?

Defining the right KPIs to use in the competitive landscape and how the company is performing relative to those KPIs can present the company’s story in the best light. Once the right KPIs are defined, having the ability to quickly and accurately calculate and forecast them will provide investors with confidence in management’s ability to manage and grow the business.

Similarly, having established budget and forecasting processes in place, including long-range planning, and a separate street model which can be shared with bankers and analysts will allow management to give guidance and measure performance without surprises.

Step 4: Invest in The Right Tools

Employing reporting and automation tools improves data accuracy and governance while increasing the speed of insights that public companies require. Paramount to that tech infrastructure is the creation of a single source of truth for clean/accurate data — especially for any metrics that the company plans to disclose through the IPO or ongoing public disclosures.

The company’s tech stack must also be capable of combining and consolidating multiple general ledgers and account for foreign currencies and their impact on “results versus expectation” or prior periods. If you do not have one already, investing in a corporate performance management (CPM) tool is a must to improve driver-based forecasting, measure performance, consolidate results, and perform variance analysis — particularly for companies that have grown by acquisition and/or have multiple, disparate ERPs. Being public necessitates more structured insight into business performance and, almost always, issuance of financial guidance; having a well-implemented and adopted CPM tool makes a CFO shine.

Finally, a business intelligence tool, often in concert with a data warehouse, enables an organization to manipulate, connect, and analyze operational data to understand business performance and insights — especially if the company will be disclosing Non-GAAP metrics and measures. Given the complexity of these various tools, ensuring that the readiness team includes a CFO tech advisory partner will be a critical element for effective and cost-efficient technology optimization.

Step 5: Hire and/or Retain the Right PARTNERS

Private companies, particularly private equity-backed companies, are known for lean teams. It is important to retain a high-quality adviser who can help you get to the point of being public. The experience a readiness firm or IPO adviser can provide — as it relates to developing the equity story, creating a financial street model, educating internal parties about the IPO process, assisting with audit preparation, and keeping the bankers focused — is incredibly important.

The years of experience and transactional expertise are invaluable in terms of avoiding missteps and maneuvering through the process. Aside from having strong advisers, the company must also invest in internal resources to actually run and govern a public company. As such, there are a number of positions that will need to be upgraded to ensure scalability and confidence in meeting public company filing deadlines. This preparing phase not only represents a great time to hire but also to train staff currently in place.

The broader IPO market is now on pause — a result of less-than-ideal pre-recessionary and inflationary marketplace conditions. But those conditions are not here to stay, at least not forever. Private equity-backed companies would be wise to use the current pause period to prepare, prepare, and prepare some more.

What does that preparation look like? Ensuring that companies take the time now to invest in the right partners, resources, technology tools, and team. A team who can meet milestones, who are ready to take the company public as soon as market conditions warrant it, and who can effectively run the company as a successful public entity in the long run.