We find ourselves in the middle of one of the greatest wealth transfer periods of all time. Those with wealth must decide whether they want to make transfers, and if they do, they must decide how much, to whom, when and in what structure?
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Closer to home in the Denver and Boulder market, we’ve seen a significant uptick in IPO activity. Our firm has advised six clients on IPOs during the past several months, compared to almost none just a few quarters ago.
The public equity and debt markets continue to remain an attractive source of capital for growing companies. Respondents to the poll of more than 700 venture capitalists, professionals and entrepreneurs overwhelming cited early and expansion stage companies to be the most promising for investment and technology, 39 percent, health care and life sciences, 25 percent, and energy, 19 percent, as industries with the largest increase in IPO activity.
Before going public, it is critical to weigh the costs and benefits to determine if an IPO is right for your company.
Public companies enjoy many advantages, including access to capital at reasonable prices, liquidity for employees and investors and currency that can be used to fund acquisitions. Public company status can also provide financial incentives to key employees, helping to attract and retain talent. There is also the intangible benefit of enhanced credibility with business partners and increased visibility in the marketplace. Done correctly, an IPO can be an effective way to enhance the corporate brand.
Tapping the capital markets does have its challenges. Often, the most difficult decision for business owners is determining whether they are ready to relinquish their ability to make decisions without the white-hot spotlight that comes with publicly-traded stock. Management must also evaluate governance and internal control processes to ensure they are prepared to meet the high standards demanded by regulators, exchanges and new stakeholders.
Any startup planning to go public should undertake a comprehensive readiness assessment, including an evaluation of its corporate governance structure, its systems and processes, and its financial and management reporting capabilities.
Making the transition from private to public and meeting both the Securities and Exchange Commission’s rules and public expectations involves a number of steps, which need to be accomplished simultaneously.
The corporate governance assessment should include a review of the board of director structure and committee composition, code of ethics, exchange requirements, disclosure controls and procedures, and related matters. This includes identification and documentation of key financial and operational controls.
Management must evaluate the company’s operational and financial systems to determine whether they are adequate to meet the reporting requirements of a public company.
Internal control over external financial reporting must be assessed to ensure management can meet regulatory filing deadlines. Also, management must develop industry appropriate key performance indicators and be able to track and forecast its performance in order to provide relevant information to external stakeholders.
Adding key personnel to the management team, including a chief financial officer who can successfully represent the company on Wall Street, is an important consideration. The CFO must be supported by a competent finance team that can execute the reporting for historical financial information as well as forecast future results. The executive team should be top-notch and capable of performing under the pressure and scrutiny that comes with being a public company.
A company that adopts an IPO readiness plan early in the process is best positioned for a successful IPO. Ideally, a company considering an IPO should have its financial and management reporting mechanisms in place for several quarters prior to completing its IPO so that any kinks can be ironed out ahead of time. IPO readiness means a company is able to behave like a public company immediately before, during and after its IPO.
A company considering going public often has previously obtained bank financing and/or venture or private equity funding. Tapping the public markets may be the logical next step. But embarking on an IPO and completing it successfully calls for strategic planning, sound advice, and a full understanding of the potential risks.
Mike Bearup is the managing partner for KPMG LLP’s office in Denver. He can be reached at email@example.com. Aamir Husain is the head of KPMG’s IPO Readiness Services practice and he can be reached at firstname.lastname@example.org.