I recently met with the owner of a medium-sized family business. One of the topics we discussed was the possibility of his company going public through an initial public offering (IPO). Whenever IPOs are discussed, I sense from the company owner a feeling of both excitement and doubt—excitement over the thought of the possible benefits of an IPO and doubt over the company’s readiness to go public, or whether going public is the best option for it to pursue.
With this in mind, here are some of the factors to consider before deciding to launch a listing debut for the company’s shares on the stock exchange.
Readiness of the company’s financials
Being an auditor, I might be biased about this, but I believe this is an important area that a company has to evaluate. Companies that aspire to go public have to ensure that their accounting records are auditable, and that the financial statements (FS) are in order and compliant with the prescribed financial reporting framework.
The Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE) need the company’s audited FS for the past three years to check the organization’s track record. Regulators require that the audited FS be accompanied by an unqualified external auditor’s opinion, and this may sometimes need restatement or reissuance of the previous years’ FS. In one case, it took almost three years for an entity to prepare an IPO-ready FS.
To ensure availability and completeness of the FS, the entity has to install internal controls, particularly on the financial statement closing process. Once listed, the company needs to comply with reporting requirements and this may entail changing or upgrading its current accounting system to generate the information required by regulators. Listed companies are required to release quarterly data 45 days from the close of the quarter and, for annual FS, some of our clients aim to release the audited FS within 60 days from the close of the calendar year. Hence, the accounting system should be able to generate timely information due to this tight deadline.
To make the IPO work, the company needs to have a strong board of directors. The right board members will help grow the business. Recruit board members who can serve on the audit committee to ensure that there is proper oversight over the financial reporting process. Companies need to comply with the SEC’s Code of Corporate Governance and the PSE’s Corporate Governance Guidelines on board composition, including the number of independent directors. Regulators also mandate the separation of the chairman and CEO positions. These two positions are typically held by a single individual. If this is the case, the entity has to appoint a chairman and another person to be the CEO.
Prospective underwriters and investors are particularly interested in the strength of the management team. The company needs to build an executive team with experience in driving the organization’s key business functions. The quality of leadership is one of the biggest factors that investors look at outside of the company’s financials.
The company must think about its long-term business goals. During the IPO process, underwriters and investors, as well as securities regulators, will need the company’s clear plan on using the proceeds from the issue. In one IPO meeting that I attended, the management identified various purposes without clear linkage to their business strategy just to complete the use of proceeds section. Such a practice does not communicate a sound business plan. Having a sound business plan enables the company to identify how much of the IPO proceeds it will need and how this impacts the number of shares the entity has to float to the public.
Freedom in management decision-making
Gone will be the days when the owner makes the major decisions for the company alone or during family dinners. A certain degree of spontaneity is lost as management is required to get the prior approval of the board of directors for major decisions and even the approval of shareholders for certain special matters.
Loss of confidentiality
A company will lose a great deal of confidentiality once it becomes public. The disclosure obligations in the prospectus and the continuously required disclosures force companies to sometimes divulge sensitive information. Is the company willing to disclose information, considering competitors will have access to these details? Also, a series of poor quarterly results or an unexpected legal case can adversely affect the company’s public image.
A company needs to have extra cash to fund the IPO process, as there are many expenses that will be incurred. A company must consider both the initial costs of going public, as well as the annual costs that come with being a reporting issuer. These costs generally include IPO tax, listing and maintenance fees, SEC fees, and other transaction costs such as underwriters’ fee, legal and accounting fees, etc. A company must also consider the time and effort required of management during the IPO process, and ensure that this will not affect the day-to-day operations of the business. The going-public process takes time and may even extend to more than a year, depending on the complexity of the business, the state of financial markets, and the responsiveness of regulators.
Going for an IPO is an intensive and complex process that affects every facet of a company’s operations. Although there are a lot of expected benefits in going public, a company must seriously consider the implications and realities of being a public corporation.
Boyet Murcia 3rd is a partner at Audit & Assurance of P&A Grant Thornton, one of the leading audit, tax, advisory and outsourcing firms in the Philippines, with 21 partners and more than 850 staff members. We’d like to hear from you! Tweet us: @PAGrantThornton, like us on Facebook: P&A Grant Thornton, and email your comments to firstname.lastname@example.org or email@example.com. For more information, visit our Website: www.grantthornton.com.ph.
As published in The Manila Times, dated 13 September 2017