A CFO is quite literally in the driver’s seat when it comes to planning an Initial Public Offering (IPO).
Leading the finance team, they must prepare the business financially, while also acting as the credible voice to investors during their IPO journey – presenting the business and commercial case.
Yet, often leading the transformation from private to public is a one-off occurrence for an inhouse CFO.
2018 saw more IPO failures than successes. So, what went wrong? While much is attributed to global uncertainty and increased market volatility, there are other factors at play. These include setting financial benchmarks too low, over-valuing, not assessing the market readiness for the business well enough, or even market timing – many of which can be controlled with robust planning.
While an IPO failure is not the end of the road for a company, there are ways to ensure a CFO (and Board) mitigates these risks.
The good news is a CFO is not alone. Here’s the top five things a CFO needs to consider in preparation for an IPO and how to build the right team for success.
1). Assess IPO readiness
A CFO is in the best position to answer and advise the CEO and Board whether an IPO is the best way to achieve their goals. To answer this, there are two key considerations:
- Do the benefits of the IPO outweigh the disadvantages?
- Does it fit in with the business’s wider strategic plan, vision and objectives?
An IPO is an intense process that can take up to two years to plan and execute. There are several ASX requirements requiring comprehensive financial and legal due diligence. This can take away from the normal day-to-day business activities – at a time when management needs to be at its best.
While there are many arguments for and against an IPO, assessing readiness comes down to knowing how an IPO fits to the specific business in question. It’s also one which considers the business’s current and future predicted internal and external forces, such as political, legislative and economic conditions.
Advantages of an IPO are: the opportunity to accelerate growth through accessing capital; expanding opportunities otherwise unavailable; building market reputation and awareness; and also being a- liquid exit option for owners and investors.
However, in context, is that what founders are looking for? While IPOs can be a great way to aid an exit plan for founders or financial investors such as Private Equity Investors, if the founders want to retain complete control, perhaps an IPO is not the best option.
Disadvantages of IPOs may include maintaining strict compliance with heavily regulated conditions. These require extra support and hold legislative responsibility and accountability, particularly for the Board and directors. These all come at a cost. There must also be market interest and demand – an IPO requires a clear path to commercialisation aligned with the business objectives.
Once the decision to IPO is made, the right IPO team needs to be set-up – this Due Diligence Committee (DDC) is made up of independent accountants, tax advisors, legal specialists and industry experts and are the CFOs’ allies who analyse and check-off all the materials for the prospectus.
2). Gather data
It’s critical for a CFO to gather as much data about the business as possible – this evidence is critical in supporting the case for commercialisation. A CFO is no stranger to data and pre-IPO is the point at which a CFO must be at their peak performance in their data gathering ability and thorough analysis!
The due diligence process begins with critical analysis of financial, tax and legal data. The stages of the due diligence include:
- Understanding the target business;
- Quality of earnings assessment;
- Balance sheet and working capital analysis;
- Risk assessment and mitigation.
Due diligence materials and information will build an accurate and clear prospectus. They also enable the CFO to get a clearer picture of any structural changes to be made, or inefficiencies rectified.
The prospectus is bound by strict legal and ASX requirements. It includes business information, financial performance data as well as information regarding use of funds, capital structures and dividend policies. Due diligence materials also aid and support the business valuation. Valuation is both an art and science, however over valuing a business can have serious implications down the track for an IPO. The dotcom bubble demonstrates the importance of proper due diligence with the right experts.
During this stage, the CFO must also analyse impending scalability. For example: are the business structures tax efficient and suitable for a public company? Are the capital structures suitable? Changing capital structure may be necessary pre-IPO to line up with the strategy – as the aim is typically to raise capital once floated, capital structures must be set up to support this.
Once the prospectus is completed it’s lodged with ASIC. Accuracy is not only important legally, it is also crucial to performance once floated. Errors in forecasting earnings and dividend forecasts will severely impact the IPOs price reactions in discussions with potential underwriters, sponsoring brokers and pre-IPO investors as well as on the day they are announced.
3). Board, management and corporate governance
The right Board and the CFO relationship is critical to the success of an IPO. Boards protect and find ways to support growing and enhancing the business. They must also bring a depth of relevant experience to propel the organisation forward.
The information and guidance a CFO can bring to a Board is invaluable in their decision-making process. A Board must be backed by a strong management team. It’s important to ensure that pre-IPO, any skills gaps are identified and filled within the team.
As part of the IPO process, ASX will assess the Board’s qualities and policies to ensure they meet ASX requirements to determine organisational viability once public. In assessing a Board, ASX will look at the Boards experience and abilities to perform in the best interests of their shareholders and stakeholders, they will also undertake character assessments – such as previous bankruptcy’s.
Post floating, a well-governed Board is a continuing obligation under the Corporations Act – with corporate governance policies making up continuous reporting.
4). Ensure policies, systems and processes are watertight
The organisation needs to be running like a publicly listed company before it becomes one. This involves transformation of culture. The CFOs role in this is to ensure that all policies, systems and processes are laid out and communicated across the entity.
As a publicly listed company, these policies will be critical in ensuring obligations are met – including ongoing financial reporting, continuous disclosure, ASX rules and other continuing duties under the Corporations ACT.
As structures were initially assessed for scalability, so too must the systems such as CRM and ERP to achieve scalability and fluidity across departments. Old systems and processes can hinder organisational ability.
IT assets are another critical factor, in particular, security issues are imperative. Mandatory data breach reporting requirements and cyber safety needs to be understood at all levels; as well as making sure the infrastructure can be upheld against cyber warfare.
5). Investor relations
Under the Corporations Act, there are restrictions on advertising before the prospectus is lodged with ASIC. However, once lodged, it’s not unusual for the CEO and CFO to undertake investor roadshows.
Investor roadshows are an opportunity for the CFO to change hats and market the business to sell the IPO story. Test roadshows are a good way to get feedback initially to help the CFO clarify the messages that are important as well as articulate the business with more exactness.
It’s at this point where the CFO is key in explaining the commercial case to investors, to get them on board. The CFO needs to know the business inside out to best present the roadshow and lead the transformation from private to public.
Overall a CFO is key in transformation from private to public. Their ability to address these five key areas will help them drive the business smoothly through the IPO process. William Buck’s Corporate Advisory team can assist with ASX listing readiness and requirements; business restructuring prior to IPO; assistance with Board selection; prospectus preparation; independent accountant reports and ongoing reporting requirements.
Looking for a clearer path to IPO? Contact our Corporate Advisory team today.