Armanino Blog

The CFO's Role in Preparing for an IPO

by Ryan Prindiville
March 13, 2020

An initial public offering (IPO) is a key milestone in the growth of a business, but it's not an end goal by itself. Instead, an IPO starts a new phase in the company's lifecycle that requires careful preparation and management, because the real objective isn't going public — it's staying public.

To make a successful transition, a growing company will need more rigid internal processes and will have to meet stringent compliance requirements related to its financial reporting, internal controls and other key areas. The CFO plays a critical role in preparing for an IPO by helping put in place the people, processes and technology the company will need to meet its compliance obligations and thrive as a public entity.

Laying the groundwork for an IPO is a complicated undertaking with numerous steps to complete and roles to fill. According to our CFO Evolution research, the top pre-IPO challenges CFOs cite include:

  • Getting the right team in place (32%)
  • Presenting the financial story to investors (24%)
  • Meeting governance, risk and control requirements (22%)
  • Finding the right external experts (13%)
  • Implementing and supporting technology (9%)

Meeting these challenges requires a specific leadership skillset that's different than the skills needed to grow a young startup. The CFO should have previous public company experience and, ideally, will also have been through a public offering before.

The Right Finance Team

One of the most common areas that the CFO needs to shore up is the technical capabilities of the finance team. The reporting and compliance requirements of a public company are far more complex than for a private entity, so pre-IPO businesses need to bring in professionals with more detailed knowledge and accounting skills.

For starters, the company will need financial planning and analysis (FP&A) professionals, because external investors will judge its performance in large part against its revenue and expense forecasts. It's critical to develop accurate forecasts, as well as effective reporting controls and capabilities, to demonstrate quality earnings that reassure investors and avoid unwanted surprises.

Depending on the exchange a company chooses for its listing, it also may need an internal audit team or an internal audit service provider. Either will play an important role in assuring investors and regulators about the strength of the firm's compliance practices and the accuracy of its financial statements.

Effective Reporting

Probably the most obvious difference between a public company and a private entity is the need to report financial results on a quarterly basis. In addition to revenue, profits and expenses, a public company will need to determine the metrics, both GAAP and non-GAAP, that help tell a compelling story about its performance and opportunities to investors and other stakeholders.

Along with the numbers in the financials, the CFO will also need to prepare a management discussion and analysis (MD&A) section that provides narrative explanations about a variety of issues, such as the metrics used in the financial reports and why the company believes they're helpful to investors. The company is also required to provide disclosures about material trends or other significant information that can affect results or operations.

The transition to this quarterly reporting can be difficult for a finance organization. To smooth out the process before the IPO, the finance staff should practice the steps involved in preparing and releasing financial statements, just as if they were already public.

IPO-Ready Technology

Effective reporting requires the right technology, because the disclosure requirements of public companies are stricter and the deadlines are tighter. Most growing firms have a blend of technology tools and manual processes that reduce overall efficiency and can create investor disappointment and regulatory issues if important deadlines are missed.

An IPO-ready infrastructure typically includes cloud-based enterprise resource planning (ERP), customer relationship management (CRM), budgeting and forecasting, and equity management systems. Together, these systems will improve the speed and accuracy of the data feeding the company's forecasts and actual results.

Another best practice is to deploy software to help automate the financial close by transferring data between systems and formatting documents automatically. Companies should also explore controls documentation software that explains not only the company's controls and how they should operate, but also documents management's rationale for developing those controls.

A Strong Control Framework

A pre-IPO company will need to develop, test and document a strong framework for its internal control over financial reporting. In addition to meeting regulatory requirements, strong controls help assure investors about the accuracy of the company's financial results and disclosures.

If the company hasn't worked with an external auditor before its offering, it will need to prepare to have its books and its controls framework audited. Effective processes and clean records can go a long way toward making the process run smoothly and reducing audit-related fees.

It's helpful to regard an external audit as an ongoing process instead of a year-end event. The CFO and audit committee chair should meet with the external auditors at least quarterly to review the company's operations, financial results and any technical accounting issues. Having these discussions outside the audit process can reduce tension, as well as potential fees.

To learn more about preparing for an IPO, contact our IPO readiness experts.

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Ryan Prindiville - Consulting | Armanino
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