3 ways auditors can help companies prepare for an 'IPO window'
2019 has been a big year for the IPO market, with many high-profile companies — such as Uber and Lyft — making their debut into the capital markets. While it’s an exciting and highly anticipated time for many companies, going public can quickly become a disappointing experience if the market conditions leading up to opening day are not yielding a company's desired return.
External factors — such as commodity pricing, market sentiment and political developments — can impact a company’s opening position and are beyond management’s control. For many companies, the biggest opportunity that can result from proper planning and execution is timing their offering to hit the anticipated optimal pricing window.
Once a company has decided to go public, it will evaluate the market to determine the best time to maximize its value. This period of time, known as a market “window,” occurs when public investors are more receptive to purchasing shares in a newly-public company. Hitting these elusive windows is a concern for many companies and can lead to major pricing setbacks if they are not prepared to act swiftly and execute the registration process when the right timing strikes.
However, despite the many factors beyond a company’s control when going public, management can take steps to prepare for a pricing window and successfully time the IPO.
Engage external auditors early. When companies go public, external auditors must ensure that previously issued financial statements are upgraded to meet SEC requirements. One of the requirements for SEC compliant financial statements is higher independence standards for auditors, which means they have to reassess their independence. This seemingly straightforward process can take time — lasting anywhere from two weeks to several months — as auditors review their global compliance with not only the company and its subsidiaries, but any affiliates including private equity investors.
The challenges associated with more rigorous independence requirements was recently highlighted by a company attempting to go public. When reassessing independence, the company's external auditor discovered conflicts related to SEC-prohibited services for a foreign subsidiary of the majority owner. As a result, the auditor had to complete additional independence procedures and management was required to request regulator relief to continue with the auditor, ultimately delaying the process by two months. Given the volatility of macroeconomic market factors, this delay resulted in the company's inability to close the $850 million transaction, and the original founding members were not monetized as planned.
Engaging external auditors early and ensuring independence standards are met is crucial to avoid derailing a company’s timeline.
Assess GAAP segment reporting and align with marketing communications. Accelerated financial reporting timelines, increased disclosure requirements, and becoming Sarbanes-Oxley compliant are just a few of the new requirements a company will have to contemplate prior to their IPO. Although these tasks are often seen as compliance activities, evaluating the impact of these requirements upfront, rather than waiting until after the company begins the process of going public, will help a company maximize its opportunity to hit the optimal market window.
For example, required segment disclosures are intended to provide a view of the business from management’s perspective. Often, evaluating this reporting requirement is performed late in the offering process and is disconnected from the company’s IPO marketing strategy. However, identifying GAAP segments concurrently with developing the company’s IPO marketing strategy early in the planning stages of the offering will yield significant benefits. The reporting segments and market strategy messages of how management assesses performance and makes internal capital allocation decisions should be consistent.
Successful IPOs align these messages early, ensuring such consistency across all channels. This consistency ultimately helps to avoid confusion among working group members and by the SEC when commenting on the registration statement, thereby limiting any potential delays.
Know how acquisitions will impact the registration. Acquisitions can have a considerable impact on a company’s marketing message and, depending on their significance, the registration process. Identifying the financial statement reporting requirements for all acquisitions and getting the auditor's agreement early can be a key factor impacting a company’s ability to hit its pricing window. Many companies leverage previously engaged audit firms that maintained independence to upgrade the audits to SEC compliance, but getting those firms engaged and comfortable with newly acquired subsidiaries requires thoughtful planning and coordination.
While using a previously engaged auditor can condense the timeline of acquisition audits, ensuring the prior auditor maintained an SEC level of independence is imperative. For example, the previous auditor must not have prepared the financial statements or engaged in any other activities that could be interpreted as blurring the independence line. Occasionally, the company’s primary auditor will need to perform incremental audit procedures, which can ultimately delay the company’s IPO filing date.
With the inherent risk that comes with a foray into the capital markets, companies that invest in preparation will be best positioned to raise capital when the right opportunity presents itself. By focusing on specific complex matters early in the process, management teams and stakeholders will be able to maximize the IPO pricing window when going public shifts from a long-term goal into a current reality.