The CFO’s Critical Role in Preparing for an IPO
All management teams have faced unprecedented external challenges in the past several years, culminating in particularly unusual business conditions in 2020. While we slowly emerge from the global economic disruption and resume “normal” levels of business, some private companies are taking the opportunity to consider whether it’s time to launch an Initial Public Offering (IPO).
Based on the recent uptick in IPO activity, it appears that many management teams and investors are confident that the worst is now behind us. Beyond the expected movement in the biotech and technology sectors, retailers and airlines have also recently gone through an IPO on NASDAQ.
Behind the scenes, the CFOs of those companies are likely breathing a huge sigh of relief—and, hopefully, planning a well-deserved vacation. The IPO represents the culmination of years of extensive preparation in which the CFO has played a critical role. In fact, all of the NYSE’s Six Signs that You’re Ready to Go Public relate directly to finance and operations:
- You Can Accurately Forecast Financial Performance
- You Have the Right Executive Team in Place
- The Company Regularly Closes Its Books On-Time and is Audit-Ready
- You Have Realistic Valuation Expectations
- There’s a Compelling Business Case for Going Public
- You Have a Clear, Strategic Roadmap
Accurately Forecast Financial Performance
The CFO must be able to provide accurate revenue and cost projections before the company is considered IPO-ready. The finance team requires agile technology platforms to arrive at accurate projections and flexible control structures to prevent surprises.
The Right Executive Team is in Place
All stakeholders of an IPO rely heavily on the company appointing the right executive team, and the CFO may be the most important executive of all. Investors, for example, rely on auditors’ assessments of the financial and other business operations that the CFO has established when deciding whether to commit their capital. In addition, the CEO must personally attest to the accuracy of the financial results and integrity of the control framework based upon the CFO’s guidance.
Closing the Books On Time & Being Audit-Ready
Market demands transparency, speed, and accuracy—and must report within SEC guidelines.
Stakeholders in public companies demand transparency and speed when it comes to financial and operational results. In addition to the executive team, it’s important to expand the accounting and finance department with seasoned senior staff members to ensure the accuracy and integrity of financial information.
Companies that go through an IPO also need to add an Investor Relations (IR) function to effectively communicate with the market and ensure that financial reports are filed on time with the appropriate agencies. For example, most companies are allowed only 60 days after the close of the fiscal year to deliver a 10K to the SEC. Soon after that, the company will need to file quarterly results within 45 days of the quarterly close.
Realistic Valuation Expectations
The valuation of an IPO can be a tricky subject. The CEO and CFO will have a stronger negotiating position if they are armed with the right financial information and can provide evidence of a strong operational framework to support the growth of the business.
Compelling Business Case for Going Public
Companies have many options beyond an IPO to secure capital for business growth. The CFO’s analysis of all of the alternatives is critical to helping the management team decide whether going public is the best choice.
A Clear, Strategic Roadmap
A strategic roadmap is critical for a company going through an IPO. It provides investors with the assurance that the management team is organized and can execute to achieve growth goals. The CFO has a large part in developing the technical and operational platform to support the company’s strategy and growth.