Going Public, Part II: Conducting Your IPO Readiness Assessment

A comprehensive IPO readiness assessment is at the foundation of successfully taking your company public. Along with helping you recognize potential problems in advance, an IPO readiness checklist assists you in creating strategic timelines that are customized for your business. Ultimately, a holistic approach to IPO readiness is essential when it comes to preparing for life as a public company.

In this blog (part two of a six-part series), we’ll take an in-depth look at IPO readiness assessments to help you get ready for this important process. This is because the better prepared you are, the more efficient and affordable your IPO readiness assessment will be.

12 Internal Steps to Include in Your IPO Readiness Assessment

In the following sections, we’ll review the most important internal tasks to add to your IPO readiness checklist. All of these functions are intended to better prepare you for life as a public company.

1. Strengthen Your Public Image

It’s crucial to begin cultivating your company’s reputation and public image as early as possible since it can’t be achieved overnight. A positive brand reputation is one of the most effective ways to generate interest in your stock pre-IPO and maintain investments after you’ve gone public.

Be sure to focus on environmental, social, and corporate governance (ESG) as you work on building and managing your business reputation. Here’s a snapshot of each of these components:

  • Environmental governance looks at your energy use, waste, pollution, treatment of animals (if applicable), and whether you make an effort to conserve natural resources.
  • Social governance considers your employees’ working conditions, whether you work with ethical suppliers, donations you make to charities, and if you take shareholder interests into account when making decisions.
  • Corporate governance looks at whether you use transparent accounting practices and if shareholders have the opportunity to vote on important issues.

It’s crucial to take an honest look at your performance within ESG standards to pinpoint areas for improvement as you strengthen your public image. This allows you to develop a compelling ESG narrative that can be shared with stakeholders and potential investors. It can also provide a competitive advantage that helps you stand out from other businesses in your industry.

A team discusses their IPO readiness assessment plan

2. Prepare for Greater Scrutiny

Life as a public company means a larger and more diverse shareholder base with different investment goals and performance expectations. Be prepared for these new stakeholders to scrutinize everything from upper management compensation to political or charitable donations. The ability to confidently justify decisions can go a long way toward building investor confidence.

3. Review Your Compensation Plans

The Securities & Exchange Commission (SEC) may require you to disclose extensive compensation information for top management, including base salaries, annual bonuses, and employee stock ownership plans (ESOPs). Ultimately, it’s your responsibility to prove that management compensation is aligned with your overall performance and industry best practices.

4. Create an Internal Audit Department

One of the most important tasks to handle during your IPO readiness assessment is to create an internal audit department. This team is responsible for measuring your risk, compliance, and control functions and conducting internal audits of financial statements.

Your audit department also plays a central role in creating an internal audit plan that ensures compliance with Sarbanes-Oxley (SOX) Act requirements, including Sections 302 and 906:

  • SOX Section 302 states that CEOs and CFOs are responsible for the accuracy, documentation, and submission of financial reports and internal control structures to the SEC.
  • SOX Section 906 outlines criminal penalties for executives who submit misleading or fraudulent financial reports, which can take the form of over $5 million in fines and up to 20 years in prison.

If you don’t feel comfortable handling internal audit activities on your own, you can outsource these responsibilities and other compliance tasks to business advisory experts (like Centri).

5. Hire a Qualified Finance Team

Your finance department must be ready to meet the demands of life as a public company, including increased transparency, heightened projection scrutiny, and pressure for accelerated filing. As such, your structured finance team must have the processes and technology to sequence tasks and remove holdups. This allows them to provide strategic value that drives business growth and supports key decisions while also ensuring control, accountability, and accuracy in daily operations.

6. Assess Your Technological Systems

Your IPO readiness assessment must take an in-depth look at your existing technology systems and processes to determine their efficiency. Is your existing infrastructure robust enough to accommodate growth and handle scalability, or will it hold you back? Can your systems deliver the increased level of detail required for SEC compliance and public reporting? If the answer to these questions is no, you’ll need to upgrade your technology systems accordingly.

7. Create a Financial Planning & Analysis Team

You’ll need to establish a financial planning and analysis team (FP&A), which is responsible for budgeting, forecasting, and analysis activities that support executive decision making. Your FP&A team can also help you identify inconsistencies that may come up when underwriters compare your past budgets with historical data. And the ability to forecast future results can help you satisfy earnings estimates, which keeps shareholders happy and may improve your stock performance.

A businessman studies financial reports.

8. Establish a Robust Compliance Program

If you don’t already have a compliance program, you’ll need to hire a chief compliance officer (CCO) and build out their team. The CCO is responsible for overseeing compliance across your business when it comes to meeting laws, regulatory requirements, and corporate policies.

The CCO also provides assurance for upper management and your board of directors that compliance procedures are in place and understood by all employees. Ultimately, a strong compliance program gives you the ability to identify and mitigate potential issues before they turn into major problems.

9. Address Anticipated Risks & How You’ll Manage Them

Your IPO readiness assessment must also contain a detailed and actionable risk management plan. It’s crucial to understand how effective risk management allows you to take strategic risks that help you achieve your business goals. Identifying, prioritizing, and creating solutions for managing risk – while also considering the current state of your organization – are essential to your success.

The SEC will require you to provide details on how your board of directors will handle risk oversight, especially when it comes to interactions with management. This means you’ll need a strong plan when it comes to handling IPO risks for companies before going public.

10. Assemble an Independent Board of Directors

Building a strong board of directors starts with factoring in the skills and experiences that will be most beneficial to you as a public company. It’s important to understand that members of your existing board of directors won’t be eligible to serve on the new board unless they’re fully independent.

As mentioned previously, stakeholders will closely scrutinize the composition of your board after you go public. The major stock exchanges also have certain requirements regarding board member independence that must be factored into your decision-making process.

11. Build a Robust Audit Committee

Composed of members of your board of directors, your audit committee is responsible for monitoring the transparency and integrity of your financial reporting and disclosure. This includes accounting policies, regulatory compliance, IPO risk assessment, and the activities of external auditors. Your audit committee also has the authority to initiate investigations if they deem accounting practices to be problematic or suspect fraudulent activities among employees.

12. Build Relationships with Investment Banks

While it isn’t a requirement, you should also consider establishing positive, mutually-beneficial relationships with investment banks. This can help you create a positive brand image, raise more capital, and maximize the overall success of your IPO. You’ll also be able to articulate your equity story, which helps potential investors understand your company and may increase the likelihood that they’ll buy your stock. 

4 External Steps to Include in Your IPO Readiness Assessment

There are also several important external tasks that must be handled during the IPO readiness assessment process. We’ll take a closer look at each of these functions below.

Employees discuss their IPO process.

1. Establish Strong Internal Controls & SOX Compliance

Many private companies require significant procedural upgrades to establish internal controls that satisfy the Sarbanes-Oxley (SOX) Act of 2002. This legislation created the Public Company Accounting Oversight Board (PCAOB), which oversees the auditing of public companies that are subject to securities laws. It also established more stringent auditing standards and compliance regulations for certified public accounting firms.

The most relevant part of the Sarbanes-Oxley Act when it comes to IPOs is SOX 404, which requires management and external auditors to report on the adequacy of internal control over financial reporting. SOX 404 is broken down into two parts:

  1. SOX 404(a) establishes the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. However, you aren’t required to hire external auditors to independently assess your internal controls over financial accounting and reporting.
  2. SOX 404(b) requires a company’s external auditor to verify that you have adequate internal controls and procedures for financial reporting in place. Their attestation confirms that you have established checks and balances to guide your financial reporting.

You’ll also need to identify the control framework used to conduct these evaluations, which is typically the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Made up of five organizations, COSO is focused on enhancing internal control, risk management, governance, and fraud deterrence among public companies.

2. Review Your Corporate Governance Policies & Procedures

Going public also requires you to take a closer look at your corporate governance and internal control procedures. The SEC has stringent financial disclosure rules for audit and salary review committees, directors, and governance issues. 

The major stock exchanges also have governance requirements regarding board composition, structure, processes, and whistleblower programs. Additionally, SOX requires a code of ethics for senior financial officers.

3. Understand Rules Surrounding External Audits

The Sarbanes-Oxley Act prohibits external auditors from issuing any kind of legal, valuation, or internal audit services. While they may provide tax or general advisory services, these must be preapproved by your audit committee. Ultimately, it’s critical to establish clear independence for permissible current or future services provided by your external auditor.

4. Have Your Financial Statements Audited

Your IPO readiness checklist should also include comprehensive audits of your financial statements to ensure complete SEC compliance. These audits must take place before your IPO since you’ll need to submit certain financial statements with your IPO registration statement.

Also known as SEC Form S-1, your registration statement includes information about the planned use of capital proceeds, your current business model and competition, and a brief prospectus regarding your planned security. The financial statements included with your registration statement must also conform to U.S. Generally-Accepted Accounting Principles (GAAP) as applicable to public companies.

Looking for guidance and support as you work through your IPO readiness assessment? Our team of experts has years of experience and is here to help. Contact us to learn how we can help you prepare for life as a public company.