The past four months were not what you would call an ideal environment for an initial public offering.
Numbers from Renaissance Capital tell the IPO story. As of July 14, there had been 71 IPOs in 2020, a drop-off of 11.3% from 2019. Total proceeds raised thus far have totaled $23.3 billion, down 21.6% from last year, and the total of 107 IPO filings is 11.6% less than a year earlier.
Not a catastrophic drop-off, but certainly a notable slowdown.
And yet, those who’ve managed to push through with an IPO during these volatile times have found success. For instance, car-buying site Vroom went public on June 8, offering shares at $22. The stock closed its first day at more than double that, and a month later is hovering at around $47 a share.
Five days before that, cloud-based marketing database provider ZoomInfo priced an IPO at $21, rose 62% on its first day of trading, and is now sitting at just under $40 a share.
While this small sample isn’t about to send a rush of companies running into the IPO market, it certainly raises a question many CFOs will ask themselves: If these companies can engineer a successful IPO during a pandemic, what’s preventing us from going public once COVID-19 is contained and markets stabilize?
Make no mistake, there are a lot of companies that put dreams of an IPO on the backburner once stay-at-home orders kicked off an economic slowdown starting in March. Numerous NetSuite customers have reported delaying IPO roadmaps due to the pandemic. And many of these companies are hopefully anticipating a resurgent market in 2021.
Here’s the thing, though: While the success of IPOs during the pandemic might portend good things for the IPO market in 2021, aspiring companies with an eye on that timeframe will face stiff competition for investor dollars if the pandemic is in check. And that means the bar for standing out will be that much higher.
In such an environment, preparation and planning becomes paramount to attracting the underwriters and investors needed to make an IPO soar, and that means buttoning up business processes and ensuring your company is ready to scale. An ERP system is crucial to achieving that—especially one that unifies all critical business functions and is deployed in the cloud.
With that in mind, here are seven steps a company can take with NetSuite ERP to raise the odds of a successful IPO:
1) Get Your Financial House in Order
The importance of having a strong and comprehensive financial foundation in advance of an IPO goes without saying, but behind that common assumption is a litany of considerations that could buttress or doom a planned IPO.
Not only is it important to keep in mind that a piecemeal approach to buying financial software can prove costly down the road, it’s also critical that key decision makers be aware that regulatory requirements will prohibit them from changing any financial systems at any time during the IPO process, and for one year thereafter. Without a system in place that gives key stakeholders appropriate and real-time access to critical business data, the journey gets a lot tougher.
Companies looking to go public must be prepared to provide three years of audited financial data, meaning systems have to be capable of providing that. Investors and underwriters will want to see solid debt-to equity ratios, sufficient market capitalization and predictable revenue and earnings streams. NetSuite ERP helps on all of these fronts, providing the financial data and insight to demonstrate a company’s standing.
IPO candidates also must be capable of dealing with modern accounting challenges, such as asset valuation impairment, consolidated subsidiary financial statements issues and revenue recognition. NetSuite ERP provides the tools and capabilities to navigate that complexity. For instance, NetSuite’s Advanced Revenue Management module makes it easier than ever for companies to comply with revenue recognition accounting standards such as ASC 606.
Finally, business must establish processes for key areas that touch revenue, headcount and all other major expenditures, and the infrastructure must have the necessary controls in place to manage these processes as well as the flexibility to accommodate changes down the road.
2) Prepare for Rigorous Financial Reporting
The IPO process is greatly aided by clean and efficient production of financial statements, so there’s significant value in investing in systems and automation that support global consolidation and financial reporting. By eliminating manual reconciliations and data entry, a company can scale more effectively as the business grows in volume or complexity. Further, by ensuring that reporting processes are transparent and supported by full audit trails, a company will reap dividends throughout the IPO journey and beyond.
While SEC compliance reporting gets the bulk of the attention, it’s equally important that companies have robust management reporting capabilities, which requires deep understanding of business fundamentals. The ability to analyze past performance and forecast future performance requires investments in business intelligence and analytics. NetSuite ERP provides the kind of robust reporting and analytics organizations need to establish these practices with automated reports around key performance indicators (KPIs), role-based dashboards and the ability to drill down by department, subsidiary or location with an intuitive interface that allows even inexperienced users to perform complex analytics.
3) Establish Good Corporate Governance
The public market isn’t kind to companies that can’t effectively govern themselves; no one wants to own major holdings in the next Enron or Luckin Coffee. To avoid such a fate, companies considering IPOs should establish a governance framework that keeps board members and executive management on their toes and accountable when it comes to their roles and responsibilities.
Sadly, many private companies don’t fully understand the importance that governance plays in long-term success, and those that do make governance a priority often underestimate the time and effort required to establish effective corporate governance.
When a company goes public, regulators and investors alike demand that it be coordinated, transparent and consistent, unlike the loose policies and casual atmosphere that prevails in many private companies. In the public equity markets, governance is not optional, and each director and C-level executive must understand exactly how they relate to one another as well as to the organization and its stakeholders.
According to Ernst & Young, “public companies must develop a disciplined, consistent approach to categorizing and disclosing actual and potential risks, and develop trusted voices within management and ownership that will keep risks from clouding decision-making or derailing worthwhile ventures.”
It’s not just SEC compliance newly public companies need to worry about with their financial systems. Many will also need to be aware of PCI-DSS, SOC-1 and SOC-2 and more. ERP suites like NetSuite with Governance, Risk and Compliance (GRC) capabilities built in give businesses confidence in their reporting and auditing from startup through IPO and beyond without having to change systems. Automated controls and role-based access can embed a measure of security within the financial system as well.
4) Establish Investor Relations and Corporate Communications
While investor relations can’t sell product or secure big contracts, it can help your company preserve its reputation through the ups and downs that any organization faces.
Once a company goes public, it becomes an open book to any and all, meaning the roster of significant stakeholders will start to reach far beyond long-term colleagues and collaborators. A well-oiled investor relations (IR) operation acts like a gatekeeper, ensuring that the company is communicating effectively with the financial community and beyond by deftly integrating information coming from finance, marketing and legal teams.
A strong IR team, backed by metrics that provide a clear picture of the business, needs an infrastructure that can report on those metrics. This requires closing any gaps and building a visible and transparent reporting process long before pursuing an IPO.
By providing quick access to financial metrics and reports, NetSuite provides the capabilities companies need to build an IR organization that’s informed, incisive and prepared to face public-market scrutiny.
5) Develop Risk Management Capabilities
Going public is a process that introduces significant risk to a company, forcing it to become more accountable to a wider range of investors and regulators should it begin to perform poorly. Being able to see potential problems before they emerge can mean the difference between long-term success and bankruptcy.
Apart from ensuring that legal counsel has a strong voice, and that a policy protecting the company against the acts of directors and officers is in place, a public company also needs to be able to respond when an audit committee or the board of directors asks about management expenses, approving major costs, cash access or forecasting.
NetSuite provides access to real-time KPIs and automated rule-based alerts needed to identify risks before they become real-life problems. This helps protect against uneducated decision-making by leadership, and helps preserve your system’s integrity.
6) Put the right people in place
An IPO is not a process for the squeamish. It requires a seasoned team that works together effectively and that knows how to navigate the public equity market. In fact, research from Ernst & Young indicates that investors consider management credibility and experience among the most important non-financial IPO success factors.
Nowhere is this more important than in the financial organization, which must conform to rigorous reporting requirements dictated by Sarbanes-Oxley and other regulations. The demands of the IPO process will take the CFO away from day-to-day operations for three to four months, meaning a strong controller is needed to take the reins.
7) Know your company’s story and how to tell it
Storytelling becomes a critical business component once a company goes public. Effectively articulating everything from product roadmap to brand identity and growth objectives keeps all the stakeholders informed and confident that the company is on the right path.
In other words, it’s not enough to have a good story; it’s critical that the company’s leadership can both tell it and back it up. That means having an investor relations and communications team that’s as adept at proactively conveying the brand as it is at responding quickly to news, both good and bad.
Company storytellers need to be armed with the financial performance and KPI information that a robust ERP system provides. They need to tell their IPO narrative in a way that bolsters confidence within public markets in order to enhance future market value.
By combining these seven steps, backed by NetSuite, a company will have taken significant steps toward successfully moving through the IPO process. This by no means ensures success, but without these preparations, or a robust system underlying them, the process becomes a lot bumpier. Conversely, taking these actions and supporting them with an effective ERP deployment significantly increases the odds of smooth sailing.
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