How to Navigate Your IPO

In the wake of record initial public offerings in 2020 and 2021, many leaders may be thinking about taking their companies public. Here’s how to ensure a smooth IPO process. By Natalie Rooney | Winter 2021



Initial public offering (IPO) activity has seen a record-breaking surge that began in 2020 and rolled into 2021. In the third quarter of 2021, 94 U.S. companies went public, raising a total of $27 billion. It was the busiest July-September period for IPOs since 2000, according to a report from Renaissance Capital. Worldwide, more than 2,000 IPOs raised a combined $421 billion as of September 30, marking another record high.

If you’re one of the many leaders considering taking your company public, you may be feeling daunted by the complexity and difficulty of the process. CPAs who’ve been through the IPO process—either at their own companies or as client advisors—share their expertise and guidance.

The Timeline to IPO

Going public is a challenging, time-consuming process. A private company planning an IPO must file massive amounts of financial disclosures and other paperwork with the Securities and Exchange Commission (SEC) and prepare for an exponential increase in public scrutiny.

Meghan Depp, CPA, professional practice director of SEC services for BDO, says the general timeframe from the first all-hands meeting to the closing of the IPO is typically four to six months, assuming everything runs smoothly. However, the timing will depend heavily on the size and complexity of the organization, the structure of the transaction, and the status of the audited historical periods to be included in the IPO, among other factors. “Suppose the company hasn’t historically been audited in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB), or by an accounting firm registered with the PCAOB,” she explains. “In that case, the timeline may be longer.”

Assembling the IPO Team

A successful IPO relies upon having the right people in the right roles at the right times—and experience matters, says Richard Tarapchak, CPA, vice president, corporate controller, and chief accounting officer for II-VI Inc., who has recently guided two companies through the IPO process. Consultants may seem expensive, but Tarapchak says it is money well spent. “As much as you think you know, you need outside resources and people who have gone through the IPO process before and who understand the dynamics,” he says. “What you think you’ll save will cost you tenfold. You cannot do this on your own.”

Guy Gross, CPA, Great Lakes SEC practice leader with RSM US LLP, says the most important first step is to hire a firm to perform an IPO readiness assessment to analyze the company’s position and identify potential shortfalls. “An outside firm can augment the company’s accounting and finance departments, which are likely already at full capacity so they can’t also do everything needed for a successful IPO,” he advises.

Gross also suggests hiring another accounting firm that’s registered with the PCAOB and is independent under the rules and regulations of the PCAOB and the SEC to help them through the IPO process: “This firm would help with accounting position papers, drafting the necessary IPO documents, and providing assistance in financial reporting and the overall management of the IPO process.”

Depp adds that companies should ensure all parties, including the independent accounting firm and legal advisors, are reputable, have experience in the industry, and have the necessary resources to meet the company’s goals and timeline. Next, it’s time to IPO.

Seven Steps to IPO

#1: Choose an Underwriter

The first step of the IPO process requires the company to select an investment bank registered with the SEC to act as an underwriter. These underwriters are specialists who work alongside the company issuing the IPO to help determine the initial offer price, buy the shares from the issuing company, and then sell the shares to investors. When choosing an underwriter, consider their reputation, quality of research, industry expertise, network distribution reach, any prior relationship with the investment bank, and past relationships with other companies.

Underwriting an IPO can be a long and expensive process. It requires time, money, and a team of experts, but a good underwriter can be the difference between a successful IPO and a failure.

#2: Perform Due Diligence

Brace for the most time-consuming part of the IPO process: the mass quantities of paperwork that must be completed by the company and the underwriters. This is also when the issuing company must register with the SEC.

The following contracts between the company and the underwriter should be completed during due diligence, as well:

Firm commitment: This agreement states the underwriter will purchase all shares from the issuing company and resell them to the public.

Best efforts agreement: The underwriter doesn’t guarantee a dollar amount but will sell the shares on behalf of the issuing company.

Syndicate of underwriters: Sometimes IPOs come with large risk and the underwriting bank is unwilling to take on all of it. In this case, a group of banks will come together under the leading bank to form an alliance, allowing each bank to sell part of the IPO and decrease their risk exposure.

Engagement letter: There are usually two parts of an engagement letter: the reimbursement clause stating that the issuing company will cover the underwriter’s out-of-pocket expenses, and the gross spread, also known as the underwriting discount, typically used to pay the underwriter’s fee and/or expenses.

Letter of intent: There are three parts to the letter of intent: the underwriter’s commitment to the company, the company’s agreement to provide all information and cooperate, and the company’s agreement to offer the underwriter a 15 percent overallotment option.

Red herring document: This is a preliminary prospectus that includes information about the company’s operations and prospects except for key issue details, such as price and number of shares.

Underwriting agreement: Once a share price is determined, the underwriter is legally bound to purchase the shares at the agreed-upon price.

S-1 registration statement: This document is required to be submitted to the SEC and contains two parts: the prospectus and supporting documents. The prospectus is a legal document provided to potential investors. It must clearly describe the company’s business operations, financial state, operations results, risk factors, and management and must include audited financial statements. Supporting documents may include additional information and exhibits that the company isn’t required to deliver to investors but must file with the SEC.

#3: Arrange a Roadshow

An IPO roadshow is a traveling sales pitch where the underwriter and issuing company travel to various locations to present their IPO and gauge investor interest. Based on this information, the underwriter can better estimate the number of shares to offer.

The COVID-19 pandemic has shifted many roadshows to a virtual format, from week-long, face-to-face events to travel-free events completed in about half the time. Given the time and cost savings, experts anticipate virtual roadshows will remain the norm for the foreseeable future.

#4: Set the Share Price

Once approved by the SEC, the underwriter and company will set the effective date, number of shares, and the initial offer price. Typically, the price is determined by the value of the company. This is done via the valuation process and occurs before the IPO process even begins.

Considerations when pricing an IPO include the value and reputation of the issuing company, the outcome of the IPO roadshow, the issuing company’s goals (i.e., the amount of money to raise), and the condition of the economy.

#5: Go Public

It’s finally time! On the agreed-upon date, the underwriter will release the initial shares to the market.

#6: Observe the Quiet Period

There’s a short window where the underwriter can’t influence the share price. During the “quiet period,” insiders and underwriters involved in the IPO are prevented from issuing any research reports, earnings estimates, or new information about the company that could impact the share price or falsely inflate the company’s valuation for a set period per SEC regulations.

#7: Let the Market Take Over

This is the final stage of the IPO process. After the quiet period, the underwriter and analysts can publish new research on the company, including earnings estimates and share price targets, which can have an impact on the stock. Everything is now public and out of the underwriter’s hands. The underwriter can move into an advisory role as the company’s shares fluctuate in the public market.

Common IPO Pitfalls

Even with a lot of planning and a top-notch team, challenges crop up. Here are three of the most common mistakes companies make.

Underestimating the timeline: Tarapchak says developing the prospectus is just one example of how time-consuming the IPO process is: “You’re telling the entire story of your business and all its risk factors. It took us many months of meetings to walk through it, meet with the investment bankers and attorneys, and publish it.”

The process with the SEC is rarely one-and-done. “You submit and the SEC will come back with questions. If you do a lot of work up front, the process is easier,” Tarapchak says. He has seen IPO submissions receive as many as 60 comments. Issues can range from how executive compensation is addressed to questions about how the pro formas are put together.

Underestimating resources: Tarapchak says the need for resources quickly becomes all-encompassing. “You’re taking the financial team and the management of a company and dedicating those folks to the IPO for a significant period of time,” he explains.

Having tunnel vision: Depp says it’s a mistake for leaders to simply focus on getting through the IPO, thinking things will soon calm down. “If you focus all your time and attention solely on the short-term goal—the IPO—it can be easy to lose track of the day-to-day or the ongoing reporting obligations post-IPO.” To avoid this, think long term: Plan for the IPO, but also plan for post-IPO reporting and governance obligations.

Beyond the IPO

During the execution of the IPO itself, Tarapchak says companies need to be thinking ahead to getting up and running as a public company. Under the Sarbanes-Oxley Act of 2002, companies are required to review their internal controls over financial reporting and declare whether they’re “effective” or “ineffective.” “It’s a huge endeavor for those who haven’t had to be 404-certified before,” he says.

Depp reiterates that the need for IPO resources extends to the time, effort, and tools that it takes to be a public company once the process is complete: “The resources required, both internally and externally, are significant. Proper planning to execute both the short-term and long-term goals of the company will go a long way in easing the process.”

But for leaders who are willing to do the hard work up front while keeping a long-term view in mind, the path to IPO can end with a company more solid and successful than ever before.

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Natalie Rooney is a freelance writer based in Eagle, Colo. A former vice president of communications for the Ohio Society of CPAs, she has been writing for state CPA societies for more than 20 years.