Pat Voll and Maureen Ryan are vice presidents at RoseRyan, a finance and accounting advisory firm. Views are the authors' own.
There is no easy switch when companies go public. Instead, they enter a transitional, often bumpy, phase that can take months and even years to overcome. Many newly public companies become overwhelmed by the operational demands. The advisors who got them through the offering are no longer around — and the finance team has little bandwidth to adjust to their new requirements, especially if they have lingering accounting issues that weren’t addressed before the big event.
What they quickly discover is that being a public company is an entirely different step than going public. Pre-IPO, typically with some extra accounting help, companies prepare as much as they can for the transition. They know operating as a public company requires a higher level of financial rigor, with its finances subject to tougher compliance requirements, including Sarbanes-Oxley, tighter reporting deadlines and increased scrutiny from all sides (investors, auditors, and the Securities and Exchange Commission, among others).
In the transition from private to public, timeliness and accuracy in financial reporting become no longer nice-to-haves but must-haves. While private companies can view financial reporting deadlines as guidelines, public companies don’t have that luxury. Their deadlines are set in stone.
Model the cadence and processes
For these reasons, a company should try to operate like a public company a year or more leading into the IPO. Doing so might entail automating manual processes, updating accounting systems, cleaning up any legacy data or account reconciliation messes and creating more efficient processes so that the finance function can keep up with more frequent and stricter financial reporting requirements and audits.
Companies can also take some early steps in the direction of Sarbanes-Oxley compliance by setting up basic controls over financial reporting. That lays the groundwork for ensuring the company operates with financial integrity.
A certain amount of bumpiness was the situation for a cybersecurity company we’ve worked with on a range of issues that went public. We were brought in to provide support as the complexity of the finance team’s workload increased, both before and after the IPO.
Three years after it went public, there’s still a sense of transition among its staff, including in finance. The company is dealing with incredible revenue growth on top of the many issues that typically strike post-IPO companies. Meanwhile, it’s still addressing legacy accounting issues. It’s learning that past challenges with financial record-keeping can persist long after a company goes public.
As a result, this company’s already fast-paced environment has become even faster, requiring a big lift from the finance function as they work to improve its operations while adhering to the stricter reporting cadence and compliance requirements.
To some extent, leaders of finance teams about to embark on an IPO can anticipate and accommodate the changes ahead, setting up the company for as smooth a transition as possible. Here are some of the changes to expect.
- Cultural shift. It’s tough to move from a startup culture to a more disciplined organization. Solid leadership can help ease everyone into this changing corporate culture.
- Public-company experience. There’s no way around it; you need people on the team who have worked at publicly traded companies. Companies that try to make a go of it without bringing in some of this experience set up themselves, and the team, for failure.
- Talent crunch. Few if any companies are immune to the “Great Resignation,” and accounting teams are no exception. Employees are leaving for personal reasons or have noticed opportunities elsewhere and are gearing up for a move. The gaps opening up across finance organizations can be especially hard for a company in the midst of a major transition, and retention of key players should be kept in mind.
- A faster pace. Growth shifts from a goal to a sudden reality. Going public opens up companies not only to new investors but customers, too. While growth is a wonderful thing, it can also be a burden if scaling efforts can’t keep up. Our client company has landed a record number of major enterprise customers since its IPO — a wonderful development but also a potential strain on existing resources.
Going public is transformative. While a newly public company gains positive exposure to customers and investors it didn’t have access to before, it’s an extremely transformative event for those responsible for making the IPO and the transition a success. Having a fuller picture of what to expect can help the finance organization determine when some skills should be supplemented or additional support is needed as the team gets pulled in different directions and adjusts to the rhythm of reporting cycles. By understanding the differences between operating as a private company and a public company, one can prepare the team, and ease them into post-IPO life.