For many chief financial officers, directing an initial public offering is one of the most challenging and rewarding tasks they undertake. How they handle the run-up to the IPO — arranging for the people, processes and technology they will need — is critical to setting the stage for success.
Once the IPO closing takes place, the CFO must immediately begin executing the company’s post-IPO business plan, so preparations should begin as soon as possible and as much as a year in advance.
Here, briefly, are five essential steps a CFO should take so as to be ready to tackle the responsibilities posed by an IPO and help the company thrive as a public entity:
1. Assess and upgrade the fiscal organization.
The CFOs of public companies spend the majority of their time away from day-to-day finance operations, so they need a team in place that they can trust. The most important hire is the controller, who leads the team in the CFO’s absence.
If the controller is very technically oriented, the CFO should also add an expert in financial planning and analysis. If the controller is more budget savvy, the CFO should also bring in a Securities and Exchange Commission expert.
Careful outsourcing of key roles is crucial, and CFOs should be actively involved in the scouting and hiring of core members of the IPO team, including an underwriter, a banker, an accounting firm, an audit firm and various legal advisors. They should have previous experience in taking a company public.
Public companies must put in place a number of rules and formalities, and some people who helped the company become successful may no longer fit in. This is an unavoidable cultural shift, and CFOs must educate and coach the organization through this delicate period.
2. Prepare for rigorous financial reporting.
CFOs must create a comprehensive IPO plan that balances the company’s short-term objectives with its long-term goals and that allows for the coming onslaught of real-time reporting required of a public company.
Excel spreadsheets won’t scale properly, and manual accounting, budgeting and general ledger upkeep are too prone to error and time consuming. It’s essential to deploy an automated financial-reporting technology solution that is scalable and easily integrated with other systems, including budgeting and forecasting, enterprise resource planning, customer-relationship management and business intelligence.
CFOs should also practice public-company reporting by implementing ever-shorter reporting times and holding mock earnings and update calls.
3. Address tax concerns.
CFOs of private companies may have limited experience in dealing with the complex tax-related issues and considerations of a public company. They need to bring IPO tax and valuation issues to the forefront to set up their companies for success.
To do this, they should work with an IPO-experienced tax advisor to reconcile their financial statements with the relevant tax provisions, while implementing systems for automatically reconciling financial data with these provisions. They also need to determine the key tax attributes that carry risks for the organization.
These may include Interpretation 48 of Financial Accounting Standard 109 requiring businesses to disclose income tax risks, Section 382 of the Internal Revenue Code related to net operating losses, and research and development tax credits. CFOs also need to account for possible future expansion and tax structuring when putting together the Form S-1 documentation for the SEC, as well as during pitches to investors.
Strategic CFOs should also avoid producing inadequately prepared valuations that can cause investors to question the company’s IPO readiness. Ideally, CFOs should work with a third-party valuation specialist with years of experience and have the auditor approve a valuation before the company grants stock options relying on it.
4. Improve processes and implement controls.
The effective review of a company’s internal controls provides assurance about the completeness and accuracy of the financial data needed to drive the business and bolster investor confidence. Following Form S-1 submission, strategic CFOs need to focus their efforts on making internal controls part of day-to-day business operations, developing a checklist for critical processes and control items. They also need to understand the Sarbanes-Oxley Act of 2002 and the Jumpstart Our Business Startups Act of 2012.
Prior to the company’s going public, CFOs should address high-risk gaps in controls by completing a risk assessment, which is a quantitative review often carried out by an accounting firm that serves as the basis for all other Sarbanes-Oxley activities. They should also finalize Section 302 of the Sarbanes-Oxley Act, the disclosure process, which is the quarterly equivalent of the Section 404 yearly disclosure. It’s essential for CFOs to have the CEO, accountants and legal team review the risk assessment.
To help ensure success, CFOs should consult with experienced peers and trusted accountants, attorneys or a banker — or attend events such as roundtables where they can build a network of Sarbanes-Oxley-savvy colleagues. Auditors can also be a valuable resource, especially when it comes to explaining the benefits of switching from an Excel-centered, manual-control environment to a technology-driven, automated-control environment.
5. Enhance investor relations.
While the SEC is reviewing the company’s Form S-1, the management team should embark on a road show to provide financial analysts and investors with the opportunity to question management — particularly the CEO and CFO — about the company.
The CFO’s financial presentation becomes vital to creating a favorable impression among investors. The presentation should include revenue, outlook, net income and operating cash flows without overpromising or being overly optimistic. CFOs also need to ensure they’re involved in the pricing process and work to provide existing and new shareholders with a solid return on their investment.