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IPO ahead - try these tips on avoiding roadblocks

The IPO process can be a painful transition and fund managers should be wary of the pitfalls. Andy Tucker of Shaw Pittman offers tips on how to avoid the worst of these pitfalls when taking a company public.

Your initial public offering is the culmination of years of preparation. Advance planning can help you avoid some of the common problems companies experience during the IPO process and help make your transition to a public company a smooth one. Here are some issues to consider before you begin the IPO process.

1. Be ready to be public. Once your company is public, analysts watch your performance closely and expect you to make quarterly revenue and earnings targets. If your company misses these expectations, your stock price will decline, often permanently. This demands that you have validated all the elements of your business model. If you have difficulty meeting your quarterly projections as a private company, you should delay your IPO.

2. Plan your public relations. In preparing for a public offering, many companies address their legal, financial and administrative needs while ignoring the Security and Exchange Commission restrictions on the marketing program during the IPO process. Frequently, the timing of a public relations or advertising campaign must be delayed, to the company's detriment, due to lack of coordination between the IPO team and the marketing department. The SEC monitors companies' media presence and has recently delayed an offering.

3. Build a solid management team. Many early-stage companies avoid adding accounting, human resource and other personnel to focus on other areas. The IPO process and the demands of being a public company will expose any deficiencies. If your resources in these areas are not sufficient, you will have difficulty closing quarters in a reliable and timely fashion. In addition, senior operational personnel are critical. While the CEO and chief financial officer focus attention on the IPO process for three to five months, the senior managers must assume responsibility for running the business or the business will suffer.

4. Resolve accounting issues early. Financial disclosure is critical to the prospectus and your ongoing disclosure obligations. Many problems can be avoided by addressing SEC accounting regulations with your auditor well before beginning your IPO. Cheap stock issues can be avoided by careful determination of fair market value when determining option exercise prices. License agreements must be structured with revenue recognition issues in mind.

5. Put your house in order. The IPO process starts months before you interview investment bankers, as your advisers review and clean up legal and financial issues affecting your company. You should put into place new contracts for management, make certain all share issuances and other corporate actions are fully documented, and implement and review employee stock plans. We have seen many problems that could have been resolved better had they been addressed earlier. Additionally, the IPO will create significant wealth for the senior management team. You should consider estate planning in advance of the IPO for maximum benefit.

6. Determine your capital needs. As a private company, it is easier to get shareholder approvals than it will be after the IPO. Be sure to have enough authorized capital to meet your acquisition, option pool and additional capital needs for a 24-month period post-IPO.

7. Examine your board of directors. A public company needs different advice from its board than a private company. As you begin your IPO, add to your board experienced executives who will lend prestige, talent and new viewpoints. You may need to add independent directors depending on your board's current composition.

8. Raise capital in advance of your needs. The worst time to raise capital is when you must complete the offering by a specific time; short-term pressures can lead to poor long-term decisions. Before beginning the process, be sure you can walk away.

9. Select your advisers well. The IPO represents the next phase in your company's growth. You will be selecting investment bankers and evaluating your relationships with your attorneys, accountants and insurers. You must be certain your advisers understand the IPO process and your needs.
To avoid problems, your advisers need to have practical experience to be able to provide you guidance beyond the confines of their expertise. In choosing an investment bank, make certain the bankers and analysts understand your vision for the company and that they are committed to your schedule.

10. Avoid surprise. The worst nightmare is surprise. It damages your credibility both with your investment banker and your shareholders. Whether the issue is an expected new competing product or standard or a disgruntled employee or shareholder, discuss and resolve it early in the process. Be up front with your problems; they invariably cause more problems the longer they lie hidden.

Copyright © 2001 Shaw Pittman

Andy Tucker is a corporate finance partner resident in Shaw Pittman's Northern Virginia office.