Preparing for the IPO Comeback

As both investors and issuers wait for market conditions to improve, the initial public offering (IPO) backlog continues to expand. As of Nov. 2, 2023, there’s only been a meager 133 IPOs so far this year, trailing 2022’s 181, according to the market observer site Stock Analysis. This is a dramatic decline from 2021’s massive 1,035 IPOs.

According to Kiplinger, looming IPOs to watch for in 2024 include online retailer Fanatics, tech companies Cerebras Systems and Waystar, and travel services company Navan, among others. Health care, fintech, artificial intelligence, and green energy companies are also expected to be among hot issues in the coming year.

In other words, all signs point to a more fervent offering revival in 2024. Here’s what CPAs and chief financial officers (CFOs) should do now to get their clients and companies ready for an IPO.

MIND THE IPO PREDICTIONS

During Deloitte’s recent “Path to Public Series: IPO Readiness Panel and Presentation,” experts predicted an uptick in equity activity to close out 2023, with even more activity in 2024, particularly in the first half of the year as companies look to get ahead of the United States presidential election in November. Jim Clayton, BDO’s private equity national co-leader in Philadelphia, notes that most surveys show an expected improvement in valuations by the second half of 2024. In fact, a recent poll by his firm showed that 80% of respondents believe an optimal IPO market will return in 2024.

But elections bring up more uncertainty, says Dean Quiambao, partner at Armanino in San Ramon, Calif. “Because of the uncertainty, I predict there will be a big concentration of companies going public in the second quarter of 2024,” he says. “Right now, you see companies dipping their toes and trying to assess the uncertainty—they’re trying to give themselves more runway for more profit and better numbers to tap the public market.”

“In days past, it was good enough for companies to say, ‘We have enough sizzle here, and we can sell the sizzle.’ What CFOs are now saying is once their companies reach profitability or have a very clear path to profitability, they’ll try to go public because a stall in the IPO market doesn’t last forever,” Quiambao says.

A tighter credit market is also driving companies to seek cash elsewhere. While some entities have been creative in debt and other financing, Gary Klintworth, senior managing director at CBIZ ARC Consulting LLC in San Francisco, notes that growth is difficult without funding or cash flow.

“Stripe, Instacart, ARM, and Klaviyo have been anticipated IPOs for several years, so these are exceptions. However, there’s an appetite for companies to tap the public markets for funding, even at lower valuations, in order to create some liquidity,” Klintworth says.

GET IPO READY

Clayton says companies thinking about IPOs shouldn’t wait long to start getting ready: “When looking back at the downturn in IPOs during the financial crisis, it’s important to mind that many companies waited, and in some cases waited too long, to start the IPO process and therefore weren’t ready when the market turned.”

Getting ready might involve a new way of documenting operations. Certain provisions of U.S. generally accepted accounting principles for public entities differ from those for non-public entities. For instance, public business entities are generally required to adopt new accounting standards before private companies, and a company undertaking an IPO must present financial statements that are consistent with public-entity accounting principles and must comply with the disclosure requirements for public entities for all periods presented.

Other topics where accounting principles or disclosures may apply to public entities but not to non-public entities include earnings per share, segment reporting, temporary equity classification of redeemable securities, certain income tax-related disclosures, and certain disclosures related to pensions and other post-retirement benefits.

When it comes to getting IPO ready, it’s often best to get some help.

“Accounting firms can help companies evaluate their systems, processes, and people, as well as their overall financial, management, and IT controls,” Klintworth says. “In addition, being able to forecast accurately is an area where assistance is necessary. Having good advisors in place to assist in the heavy lifting and pre- and post-IPO staff augmentation, outsourcing, and co-sourcing is critical.”

Clayton says that accounting firms often start by assessing the current organization—its people, processes, technology, and recent audits—to understand what’s needed to get to an IPO: “Providing a client with a roadmap and plan from the start to IPO filing, as well as guidance for operating as a public company after the flip, is important.”

When helping clients through an IPO transaction, firms should keep their clients focused on the goal of long-term growth—not just near-term profitability. The reality is, according to Deloitte, that planning should start anywhere from 18 to 36 months in advance of the anticipated IPO date. During this time, companies should work to:

• Develop a business model with sustainable growth potential.
• Assemble a strong team for the IPO journey and beyond.
• Build a solid business infrastructure and implement systems that facilitate financial planning and forecasting.
• Prepare for a smooth financial reporting close process and develop appropriate risk management practices.
• Allow adequate time to ramp up for the IPO.

“Prior experience with an IPO, especially for the CFO, is extremely beneficial, and it’s also a comfort to the investment bankers and attorneys involved in a deal,” Clayton adds.

Unfortunately, prior experience with an IPO isn’t common, says Guy Gross, Chicago-based SEC practice leader with RSM US LLP: “For most smaller IPOs, it’s a first-time experience for the company’s accounting personnel. In these cases, allowing the appropriate amount of prep time is invaluable to ensuring the process goes as smoothly as possible.”

Gross suggests this poses an opportunity for accounting firms to step up further as strategic advisors and ensure their clients not only engage with and bring in the appropriate consultants for a successful IPO process but also develop their internal teams to thrive throughout and after the IPO. Gross notes this could include forging relationships with investment bankers, Securities and Exchange Commission (SEC) attorneys, and consultants who assist with IPO readiness. It could also include helping the client to develop internal control documentation and testing and learn how to prepare quarterly and annual SEC filings, among other matters.

Gross says firms should also work closely with the consultants to ensure their clients are doing everything necessary before they go public, including complying with all the SEC reporting requirements: “Closing the books and issuing financial statements in 45 days for a quarterly filing is very quick—likely much faster than the company performed these tasks as a private company. Some companies believe they have the bandwidth to prepare for the IPO and also do all of their daily activities. This can be a big mistake.”

Klintworth stresses that nobody is ever really ready to be a public company.

“Companies need to show that they can execute on their business plans, financial projections, and key metrics for two to three consecutive quarters prior to being in a great position to prove IPO readiness. Systems, processes, and people must also be in place in order to scale,” he says.

“When you think of the big picture, the goal isn’t to just go public,” Quiambao says. “The goal is to be a successful public company that’s ready and able to consistently grow its market value.”

Jeff Stimpson is a New York-based reporter and has covered tax for 20 years. His work has appeared in various business and general interest publications, including Accounting Today and Financial Advisor magazine.

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