What CFOs Need to Know Before an IPO
What CFOs Need to Know Before an IPO
It’s impossible to understate the importance of a CFO correctly preparing their company for an IPO. Transitioning into public markets isn’t easy and requires years of planning. CFOs are responsible for putting the people, processes, and systems in place to manage this transition and create a persuasive investor story, especially in the face of market uncertainties.
The IPO market has ebbed and flowed since the pandemic, feeling the brunt of the economic instability brought on by COVID, the energy crisis, and the war in Ukraine. IPO listings dropped almost 60% year-over-year in 2021, making it one of the least active in over 20 years.
At FD Capital, we work with companies exploring IPO opportunities to recruit talented CFOs who have the skills and experience to put a long-term strategy in place. Your IPO CFO is responsible for more than just taking your company public. They’ll develop the investor thesis that will become the backbone of your marketing strategy and transition your organisation into life as a public company.
We’re breaking down everything that CFOs need to know about an IPO, including the timeline and checklist for planning an IPO up to three years in advance.
The Challenge of Going Public
Taking a company to IPO is time-consuming, complicated, and expensive. It’ll throw multiple curveballs at even the most talented CFO, who will be expected to navigate investors, regulators, and analysts.
Investor relations are at the forefront of a CFOs efforts to take their company to a successful IPO. One of the first steps of a CFO is to develop a compelling investment thesis that translates the company’s long-term vision and realises its growth potential. This investment thesis will enable both management and investors to form a view of the stock value and create a market perception.
What is Your Company’s Investment Thesis?
A top priority for any CFO taking their company to IPO is to develop an investment thesis. This proposal should set out the investment opportunity that the company represents and its potential future value. The investor thesis should set out plans for creating long-term value for investors and establish how the company has a competitive edge over its industry rivals.
Investors will want to focus on the company’s future expectations, rather than its historical performance. A well-produced investment thesis can quickly boost investors’ confidence and lead to a more successful IPO.
However, it’s not unusual for a company’s investment thesis to evolve with time, but it should be a cornerstone in how the CFO communicates with stakeholders and potential investors. CFOs should avoid making their investment thesis too complex as investors want certainty and clear communication.
Determining the Investor Profile
When a CFO is planning for an IPO, they should be considering what type of investor they want to attract when developing the company’s investment thesis. Determining the ideal investor profile requires a CFO to account for the company’s capital needs and risk profile. A CFO should decide whether the company wants to attract long-term orientated investors that want consistent returns or those who will accept short-term pain for long-term gains.
Failing to match the investor profile with your investment thesis can lead to volatility once your company goes public. Other investors, such as mechanical trades and ETFs, can have an impact on the stock value, but mismatching expectations can spell misfortune for a company’s IPO.
Giving the Markets Information
CFOs determine what information the markets get and when they get it. They’ll choose the insights that they share with stakeholders to guide their view of the stock. CFOs will typically invest in digital tools and automation that enable them to track the company’s performance in comparison to other organisations in the same niche or industry, making it easy to identify factors that could threaten or boost the stock’s performance in the markets.
A CFO preparing for an IPO needs to put processes and systems in place to support the production of information in a way that benefits the wider strategy and narrative. Developing a systemised approach to this gives CFOs more time to analyse KPIs, trends, and data insights.
Look Beyond the IPO to Life as a Public Company
Once a CFO has delivered an IPO, they’ll be spending most of their time dealing with investor relations. They’ll want to track the success of the company’s investment thesis and investor sentiment towards the stock. CFOs should be able to quickly identify any potential negative events that could impact the stock price.
Companies that fail to think of life post-IPO struggle to hit the ground running once they enter the stock market. Life in the public spotlight requires a keen focus on the company’s investment strategy, prioritising data gathering to create a positive investor story and narrative.
Setting the Timeline for Your IPO
There is no ‘perfect’ timeline for taking your company through an IPO. However, you want to give your company enough time to prepare itself for the challenges of an IPO and making the transition to a public company. IPO readiness can make or break the company’s success.
CFOs should have clear checkpoints and deadlines in place to ensure that they reach IPO milestones to remain on track. These milestones and the checklist should be shared with the company’s board to enable them to track the progress towards IPO.
3+ Years Prior to the IPO
It’s not unusual for CFOs to start laying the groundwork for an IPO at least three years in advance of going public. There are three key areas that a CFO will focus on to overhaul the company’s financial framework to ensure IPO readiness during this time.
They’ll develop a capital structure and allocation framework that is linked to the company’s growth and profitability model. Integrating these two systems allows a CFO to align the metrics they use for company growth, such as sales productivity and customer retention.
The CFO’s model should measure profitability and provide data insights on improving and operating the company’s margins prior to IPO. Most CFOs will choose to include medium and long-term target models for annual profitability as part of their IPO readiness strategy. A growth and profitability framework will empower both employees and the company’s senior management to understand resource allocation in the context of the IPO.
CFOs want to bring predictability to their targets, particularly as a public company. Part of IPO readiness is treating your company as though it is already public, ensuring that the company is delivering on their quarterly commitments and hitting its expected results. CFOs who start treating the company’s FP&A as though it was a public company make a more seamless transition to life post-IPO.
Other focuses at this stage in the IPO cycle include getting board alignment and input as part of the stakeholder engagement strategy.
2 Years Before IPO
The two-year mark is usually when a company has gone past its consideration phase and is actively planning its IPO to occur within the next 24 months.
It’s time for the CFO to focus on choosing the right value metrics to use for the IPO and early years as a public company. The current economic climate has led many to choose to focus on the ‘Rule of 40’ – an investment principle that a company’s combined annual growth rate and profit margin should exceed 40%.
The company should also be developing a consistent narrative about its future direction to produce a positive investor story. The two-year mark is also the ideal time for a CFO to start building their IPO and FP&A team. A strong team is the foundation of your IPO operations, and CFO should give them time to get the systems and enterprise planning resources in place to deliver a successful IPO.
12 to 18 Months Prior to the IPO
The final 12 to 18 months prior to IPO is crunch time for the CFO. They’ll want to conduct an IPO readiness assessment to determine any weak links within the company’s system and infrastructure. CFOs who are juggling other priorities may choose to add a project manager to their team to oversee compliance and general IPO planning.
Board readiness should also be a focus for CFOs at this stage. The company should have an Audit Chair in place who has the right financial experience and qualifications to add value to the process. They’ll be vital to helping the company in the early stages of its life as a public company.
CFOs should also be considering the KPIs that they’re choosing to track and share publicly with potential investors.
6 Ways to Prepare Your Company for IPO
Not every company will operate on a 3-year+ timeline to ensure IPO readiness. Ultimately, there are six ways that any CFO can help their company prepare for an IPO to make life as a public company easier.
- Get the Right Team in Place
It’s not just the finance team that the CFO should be focusing on. Investors will want to be confident about the executive team in place and the external auditors used. Potential investors want to be confident in the accuracy and integrity of a company’s financial results and framework before choosing to invest.
- Accurate Financial Forecasting
Before a company can be considered IPO-ready, the CFO should consistently provide accurate cost and revenue projections. Most CFOs will choose to invest in digital and enterprise resource planning tools to utilise big data in their financial forecasting.
- Getting the Company Audit-Ready
Once a company goes public, it’ll face the reality of growing demands for more accuracy, speed, and transparency in its financial reporting – while also meeting regulatory requirements. The company’s accounting and finance team will need the right tools and talent in place to support auditing and investor relations.
They’ll be responsible for ensuring that all financial reports are filed on time with the relevant agency, on both an annual and quarterly basis.
- Setting Realistic Valuation Expectations
Valuing an IPO isn’t easy. Over-valuing the stock can lead to an uphill battle post-IPO while under-valuing it can cause a headache once the company is public. Having the right financial information at hand will enable the CFO to set realistic valuation expectations during the IPO readiness phase, as well as creating a strong operational framework.
- Developing the Business Case for Going Public
One of the first steps a CFO should take when preparing a company to go public is to develop the business case for doing so. There are other options that a company has when seeking to secure capital, so the CFO should set out exactly why an IPO is the most suitable option for the organisation.
Their analysis should critically access the practicalities of the other options and give the company’s C-suite team a full picture before determining whether to go through with an IPO.
- Producing a Clear, Strategic Roadmap
Every CFO wants to develop a strategic roadmap that will form the backbone of their IPO planning with specific targets and timelines in place. A clear roadmap will boost investor confidence and ensure that the company’s executive team is in the best position possible to deliver on the organisation’s IPO potential. The CFO is at the forefront of developing the company’s operational and technical roadmap to support its IPO strategy and growth plans.
Recruiting a CFO with IPO Experience
The best investment that a company can make when planning to go public is to recruit a CFO, either on a part-time or full-time basis. At FD Capital, we work with companies to identify the most suitable candidate to support their company through the IPO process and into life as a public organisation.
While most companies will put a premium on CFO candidates with prior IPO experience, we advise choosing a candidate who can deliver throughout the IPO process and into your company’s transition into public life. CFOs without prior IPO experience shouldn’t be automatically discounted, especially if the company has other C-suite professionals, such as the CEO, with IPO knowledge.
FD Capital is proud to be the UK’s leading financial recruitment agency with a portfolio of CFO candidates with a proven track record of delivering on IPOs.
Start recruiting your IPO CFO today by contacting FD Capital at recruitment@fdcapital.co.uk or 020 3287 9501.
Image source https://pixabay.com/photos/entrepreneur-idea-competence-vision-1340649/
Adrian Lawrence FCA with over 25 years of experience as a finance leader and a Chartered Accountant, BSc graduate from Queen Mary College, University of London.
I help my clients achieve their growth and success goals by delivering value and results in areas such as Financial Modelling, Finance Raising, M&A, Due Diligence, cash flow management, and reporting. I am passionate about supporting SMEs and entrepreneurs with reliable and professional Chief Financial Officer or Finance Director services.
