Is Your Company Ready to Go Public?
More than 127 U.S. businesses held initial public offerings this year, up nearly 7 percent from 2011. Those IPOs raised more than $42 billion, with an average return of 16 percent on the offer price, according to Renaissance Capital Research.
While it hasn’t exactly seen an IPO party — in fact, some 180 IPOs were withdrawn — the market hasn’t been half bad this year, all things considered.
“Despite so many challenges this year, including the U.S. election, continued uncertainties around the global marketplace, and turmoil over the U.S. fiscal cliff, 2012 will go down in the books as a solid year for IPOs — and much stronger than 2011,” says Herb Engert, strategic growth markets practice leader for Ernst & Young. (Engert made this comment as part of a statement about the firm’s analysis of the U.S. IPO pipeline.)
Some observers predict a stronger IPO market in 2013. Thomas Brennan, a partner at the law firm Posternak Blankstein & Lund, notes that a resolution of the fiscal cliff could help the IPO market rebound in the first quarter.
“The recently passed JOBS Act contains a number of provisions that help emerging growth companies go public, including filing their S-1 confidentially with the SEC and receiving feedback before having to file publicly,” Brennan says. “I think we will see a positive impact on the IPO market in 2013 from this legislation.”
If the market heats up, is your company poised to go public? Here's what you need to know to anwer that question.
There are signs you may be ready to strut like a peacock for the world to see. Lawrence Litowitz, a partner at The SCA Group, a management advisory services firm, points out a few: “You have a strong record of growth. You have consistently met or exceeded plans and budgets. You have a committed management team. You generally have revenues of $100 million. Your earnings are comparable on a percentage basis to other public companies that you will be compared to.”
Your company should be mature enough to take advantage of the public markets and deal with the costs associated with being public. Brennan cautions: “There is a big cost-benefit analysis that needs to be done before beginning the IPO process.”
You also must have sufficient cash flow to finance every part of the IPO. “Don’t try to use the IPO to finance the IPO,” says Mark Long, a lecturer at the Johnson Center for Enterpreneurship and Innovation in the Kelley School of Business at Indiana University.
Dot the I’s and Cross the T’s
Preparation is key. Get an audit of your financials. “Be sure you know where you are financially, and be prepared to show it and talk about it,” Long advises.
You will need audited financial statements for the required periods, strong internal controls and disclosure procedures, and an experienced IPO team (including an attorney and an investment banker) to guide you through the process.
This is not a time for mistakes. “Don’t do something right before the IPO that might affect the company’s value. Don’t bet on ‘future products.’ Go with the here and now, and be honest about your numbers,” Long says.
Clean up your business practices before going pubic, too. In this age of transparency, all aspects of a business must be without glaring faults, like management not addressing planning and budgeting issues. "Each line in a budget needs to be examined and thoughtfully addressed in relation to other business needs. Glaring errors and business imbalances become apparent when this exercise is given thought. Good companies continually update their collective business knowledge into their budget and learn from where they can make improvements," says Litowitz. He adds, “Make sure that the business you are selling is one you’d recommend to your mother to invest in.”
One of the biggest missteps is kicking off the process too early, before you have met prerequisites in order to file your offering documents, like getting your financial statements audited and completing your legal review. These are the biggest causes of delay, says Jorge del Calvo, a partner at the law firm Pillsbury Winthrop Shaw Pittman.
If you’re ready, 2013 may well be a good time to go. Joseph Bartlett, an attorney with Sullivan & Worcester, notes: “If we avoid the fiscal cliff, we could see the IPO window open wide.”