Initial Public Offering

Derek Notman, CFP |

Preparation tips for the IPO process.

In case your role as an entrepreneur or high-level business exec isn’t challenging enough for you, how does the prospect of directing an IPO-Initial Public Offering appeal to you?  This is by far one of the most challenging, yet rewarding tasks you’ll undertake.  As is with any financial preparation, how you handle the run up to the IPO – arranging for the people, processes and technology that will be required, is critical to setting the stage for success.

Before we go any further, let’s define exactly what an IPO is.

Defining an IPO

An initial public offering, or IPO, is the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders, their families and friends) and professional investors (such as venture capitalists or angel investors).

The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. Until a company’s stock is offered for sale to the public, the public is unable to invest in it. You can potentially approach the owners of a private company about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of their shares to the public to be traded on a stock exchange. Therefore, an IPO is also referred to as "going public."

The reason to go public is because doing so raises a great deal of money for the company in order for it to grow and expand. Private companies have many options to raise capital – such as borrowing, finding additional private investors, or by being acquired by another company. But, by far, the IPO option typically raises the largest sums of money for the company and its early investors.

I’ve been in the business of financial planning for almost 14 years and as a Certified Financial Planner® that proudly acts as a Fiduciary for my clients, I have a legal obligation to put your interests before my own in all recommendations I make.

If your passion is not financial planning, then consider using a firm that combines robust technology with human advice to provide a digital yet personalized experience and whose philosophies match your own. 



The 5 Essential Steps To Directing An IPO

Once the board of execs has decided and agreed upon the IPO closing taking place, the CFO begins executing the company’s post-IPO business plan.  Allow your execs and CFO enough time to begin these preparations as a hap hazard approach simply won’t suffice.

Once the IPO closing takes place, the CFO must immediately begin executing the company’s post-IPO business plan, so preparations should begin as soon as possible and as much as a year in advance.


1. Assess And Upgrade The Finance Team

The CFO of your business must ensure the team is skilled.  This is not a time for rookies.  Give yourself at least a year prior to going public to heavily scrutinize the internal and external teams and to evaluate their strengths and weaknesses, as well as your own as a CFO. Being a public entity will ensure some pretty big changes and challenges that lie ahead, and your CFO needs to have their wits about them.

Once their company is public, most of the CFO's time will be spent away from the day-to-day finance operations and they need a team they can trust.  The right balance of skills and expertise required to operate as a public company is vital.  Think strategically about having a strong Controller to lead the team in the CFO’s absence.  If you need to add staff, ensure they supplement the existing skill set.

Going public is a big step and Inevitably, there are certain rules and formalities that must be put into place.  Unfortunately, these changes are not going to be welcomed by everyone and a new formal structure is going to ruffle the feathers of the few people that helped the company become successful in the first place.

What I’m addressing here is the culture shift and it’s a shift that must happen to become a successful public company. Think of the CFO as a coach for the IPO execution process – unavoidably the CFO’s job is to make this cultural shift known across the organization.


2. Prepare For Rigorous Financial Reporting

Creating an IPO plan that balances the company’s short-term objectives with its long-term goals and that allows for the coming onslaught of real-time reporting required of a public company is crucial and will ensure smooth operating procedures.

Relying on spreadsheets and manual accounting systems is not going to cut it.  Upgrading to an automated financial-reporting technology solution that is scalable and easily integrated with other systems, including budgeting and forecasting, enterprise resource planning, customer-relationship management and business intelligence is prime as a public company.

CFOs should also practice public-company reporting by implementing ever-shorter reporting times and holding mock earnings and update calls.


3. Address Tax Concerns


Bringing in a seasoned IPO tax advisor to recon financial statements with the relevant tax provisions, while implementing systems for automatically reconciling financial data with these provisions is a way the CFO can set a company up for success. They also need to determine the key tax attributes that carry risks for the organization.

These may include Interpretation 48 of Financial Accounting Standard 109 requiring businesses to disclose income tax risks, Section 382 of the Internal Revenue Code related to net operating losses, and research and development tax credits. CFOs also need to account for possible future expansion and tax structuring when putting together the Form S-1 documentation for the SEC, as well as during pitches to investors.

Strategic CFOs should also avoid producing inadequately prepared valuations that can cause investors to question the company’s IPO readiness. Ideally, CFOs should work with a third-party valuation specialist with years of experience and have the auditor approve a valuation before the company grants stock options relying on it.


4. Improve Processes And Implement Controls

Reviewing the company’s internal controls provides assurance about the completeness and accuracy of the financial data needed to drive the business forward and strengthen investor confidence. Following Form S-1 submission, CFOs need to focus their efforts on making internal controls part of the day-to-day business operations, developing a checklist for critical processes and control items. CFO’s must also understand the Sarbanes-Oxley Act of 2002 and the Jumpstart Our Business Startups Act of 2012.

Before going public, it’s important to address high risk gaps in controls by completing a risk assessment, which is a measurable review often carried out by an accounting firm that serves as the basis for all other Sarbanes-Oxley activities. They should also finalize Section 302 of the Sarbanes-Oxley Act, the disclosure process, which is the quarterly equivalent of the Section 404 yearly disclosure.  Having the risk assessment reviewed by the CEO, accountants and legal team is imperative.

To help ensure success, CFOs should consult with experienced peers and trusted accountants, attorneys or a banker - or attend events such as roundtables where they can build a network of Sarbanes-Oxley-savvy colleagues. Auditors can also be a valuable resource, especially when it comes to explaining the benefits of switching from an Excel-centered, manual-control environment to a technology-driven, automated-control environment.


5. Enhance Investor Relations

While the SEC – Securities and Exchange commission is reviewing the company’s Form S-1, the management team, especially the CEO and the CFO should embark on a ‘road show’ to provide financial analysts and investors the opportunity to question them about the company.

The CFO’s financial presentation becomes vital to creating a favorable impression among investors. The presentation should include revenue, outlook, net income and operating cash flows without overpromising or being overly optimistic. CFOs also need to ensure they’re involved in the pricing process and work to provide existing and new shareholders with a solid return on their investment.


Up till now I have been talking about all the things you would need to think of and address from a business point of view, but let's not forget the personal side of an IPO.  This transition can lead to a large influx of cash to people with pre-IPO stock.  What should they do with it?  How to they address the tax liability on it?  Think of early employees at companies like Facebook and Twitter.  When these companies had their IPO's a lot of "instant millionaires" where created overnight.

Having a plan in place for a major event like an IPO is crucial to your financial success post IPO.  You can learn a few more tips in our article 4 Money Management Tips for Entrepreneurs, Founders, and Employees of Startups.

Thank you for reading!


Derek Notman