The current economic environment has made all sources of capital increasingly difficult for companies to access. Bank lending has decreased for five consecutive quarters and venture capital is also much harder to secure. For start-ups and growth companies that offer strong value propositions, public offerings are still an attractive avenue for raising capital; however, median age to IPO and/or acquisition has effectively doubled during the period from 1994 to 2008.
As the age to IPO and/or other exits increase, it is imperative to run companies as if they were already public in order to distinguish your business from others. What does that mean? It means that while developing products, increasing revenue and cutting costs remain top priorities, the underlying business and IT processes, policies and internal controls demand attention similar to any well-run public company.
Right up to the decline in the markets, smaller companies that were already time- and resource-constrained deferred a thorough reassessment of organizational and non-urgent matters pertaining to infrastructure and the control environment. As many of these same companies slow down the pace of business activities in today’s market, they are finding more time to address these often ignored but critical areas. However, the resources needed to deal with the issues continue to be in equal demand elsewhere within the organization.
Opportunities Ahead
Companies make progress in a down market by leveraging opportunities and optimizing positive returns on investment (ROI) with scarce resources. The ROI is often realized in terms of enhanced productivity, accountability and allocation of resources as well as strengthening of eventual IPO-readiness. Recent history has proven that IPO-readiness initiatives can have a positive impact on valuations and are a key success factor in a successful offering. Companies that are in a position to benefit from recently announced government initiatives have further reasons to be well prepared.
The slowdown in the economy presents pockets of silver lining through lower labor costs, reduced turnover of skilled and valuable resources, and favorable and creative deals struck with various business partners such as vendors, contractors, distributors and customers. As CEOs, CFOs and procurement officers begin to juggle these opportunities, they should be equally concerned with the quality of internal reporting, their revenue recognition process and the ever-challenging financial close process.
As a result, the focus is on base lining their current state and drawing a road map of where they ought to be.
Current-State Assessment and Diagnostic
Companies are leveraging Protiviti’s initial assessment and diagnostic primarily to achieve the following objectives:
- Assess the current state of readiness against policy, process, people, data, reporting and methodology
- Identify readiness of core public company requirements for accurate financial reporting, efficient financial close, corporate governance and Sarbanes-Oxley compliance, and IT scalability
- Assess the urgency of solution based on cost/benefit and required timeline
- Develop a high-level work plan, timeline and resource requirements
The effort and time required to prepare for an IPO are frequently underestimated. Companies have begun to realize the importance of strengthening core business processes and controls well in advance of an offering.
As IPO markets continue to be sluggish, long-term success squarely rests on balancing the business needs in today’s uncertain market against seizing opportunities when the market begins to rebound. The competition for key resources critical to the pre-IPO process will dramatically increase as the economy turns around. Preparing in advance helps strengthen business process as well as reduce the total costs incurred.
An initial assessment provides the key first step in creating the necessary road map to an IPO or executing an alternative exit strategy. The current market conditions afford plenty of opportunities for companies to take advantage as they begin to address specific results from the assessment. Typical low-hanging fruit includes:
- Developing a baseline of appropriate policies and procedures
- Taking stock of the revenue recognition process
- Developing a baseline for the financial close process
- Performing a risk assessment and initial scoping for Sarbanes-Oxley readiness and compliance
- Assessing the IT environment and considering the specifications and selecting the right ERP system, if required
Getting ahead of the curve and accomplishing urgent and time-consuming remediation of deficiencies during the assessment is a step in the right direction. Additional questions to be considered as companies prioritize resources and ponder the best options in a down market include:
- Can we meet the reporting timelines required by the SEC?
- Can we handle the complex accounting and disclosure requirements?
- Is our IT infrastructure scalable to handle our growth?
- Does the data used to manage and report our results have integrity?
- Will any unfavorable findings resulting from the audit of the previous three years of financial information negatively impact the timing of a public offering?
- Do we understand the Sarbanes-Oxley Act requirements and how we prepare to comply?
Additionally, in this environment companies must ask themselves if internal resources are best positioned to tackle these issues from the perspective of bandwidth as well as necessary subject-matter expertise.
Often, the correct answer lies in seeking the right combination of resources and expertise to augment existing capabilities in order to move companies successfully towards an optimized public offering.
The current market presents unprecedented challenges and difficulties, but also opportunities for companies to take a step back and revisit their long-term strategic goals against their current circumstances. A thoughtful assessment and road map will position companies to make sound decisions to weather the current tough times and get ahead of the game in the future.
Article Contacts
Contact Steve Hobbs (steve.hobbs@protiviti.com), Gordon Tucker (gordon.tucker@protiviti.com) or Sherry Xu (sherry.xu@protiviti.com) with questions or comments about this article.