Greater Madison has relatively few publicly traded companies, but with a growing technology sector, that could change in the years ahead. The state’s largest public traded companies, the Fiservs, Manpowers, and Oshkosh Corp.’s of the world, aren’t in any immediate danger of being overtaken, but given the economic dynamics unfolding in the Capital City, they might soon have more company in the public realm.
The journey from a private enterprise to a public one, which culminates in an initial public offering of stock, requires months of potentially transformative review and, if necessary, the rebuilding of business processes, reassessment of personnel needs, and cultural revamping. Before the ringing of the bell on Wall Street, organizations must have in place the essential executive and advisory talent (including a board of directors) and they must be prepared for more rigorous financial reporting once their stock is traded. Whether or not they embark on the journey with the help of an external accounting or legal team, a new phase of their existence — one that involves growing shareholder value — is about to begin.
A public listing on domestic and/or international capital markets is one of several strategic options for funding business growth, but life as a public entity is more complex. The various stakeholders include investors, directors, regulators, employees, and even the media, so not only are you exposing yourself to greater scrutiny, you’re inviting entities that previously were considered unwelcome guests.
In this look at the process of “going public,” we interview several industry experts to help business operators determine whether it’s the right next step in their company’s evolution. We spoke to the following accounting, financial, and legal experts: Bruce Berndt, CEO of Berndt CPA LLC, a cloud-based accounting, payroll, and human resources firm; Dan Martin, a director in the Transaction and Financial Advisory practice of Baker Tilly, an advisory, tax, and assurance firm; Derek Matzke, an assurance principal with BDO, which provides assurance, tax, and advisory services; and corporate attorney Brett Valentyn, a partner in the corporate group of the law firm Michael Best & Friedrich LLP. They offered several points to consider as companies ponder a stroll down the IPO path.
1. Are we IPO material?
Not every successful company decides to take the IPO journey toward a public listing. The most notable local example is the Verona-based medical records company Epic, which has remained a privately run company even after a remarkable 45-year run of success in the health information technology industry, but going public remains a viable option for others.
There are other ways to raise capital in the public markets, such as through a special purpose acquisition company (SPAC) or a direct listing, in which no new shares are created and only existing, outstanding shares are sold, but typical IPO candidates are high-growth businesses with exceptional financial results compared to their peers. They also have new technology creating new markets — UW–Madison has many of these operating in conjunction with the Wisconsin Alumni Research Foundation (WARF), the university’s licensing arm — and they need capital to drive their expansion of inventory, working capital, or brick-and-mortar needs.
Often, they are private equity and/or venture capital-backed ventures or even family-run companies engaged in succession planning. More typically, they have explored other financing options — seed investment, private equity, debt financing, an employee stock option program (ESOP) — and determined that an IPO is the best strategy. They might also prefer to keep their options open and pursue alternative strategies in case their IPO fails to jell or must be delayed.
“In Madison, those [ideal IPO candidates] are often technology companies,” Matzke states. “The owners and investors in the company will need to be committed to the IPO journey since it’s not a quick and easy process.”
Martin notes that public offerings are pursued in various forms in various industries, but it really makes sense in the case of a business that needs capital to continue its growth, either organically or through acquisitions, because there is underlying economic value that must be unlocked.
“Oftentimes, the company would be fairly early stage, but it can be a situation where a company has a new product or has a new service delivery model,” he explains. “You’ll also see that the company is willing and able to go through the process … and they also need to be comfortable raising their public profile.”
While they may be high growth in terms of revenue, IPO candidates aren’t always companies that are profitable, Valentyn says. “The main aspect of a company looking to an IPO is often a growth trajectory and being able to tell that story to investors about a business model that currently works but has the ability to scale and grow, and it’s not necessarily a profitable company at the time they’re contemplating it.”
Before they venture down the public path, businesses should explore other financing options, but even before that, they should have started with the proper structure, according to Berndt. “I think this journey starts when the business is first organized and set up,” he states. “A funded startup, with a plan to raise funds from outside investors, private equity, or an IPO, needs to start on day one with the proper structure and with an end game in mind.”
In Berndt’s view, that would entail starting as a C corporation typically incorporated in Delaware or Nevada, which are considered the most business-friendly states. “Most businesses that started out may have multiple options for financing,” Berndt notes. “The performance of the company must be operating at an exceptional basis to get to an IPO.”
2. Ponder pros and cons
Weighing all the pros and cons of going public is a good place to start. According to Berndt, the pros include the following benefits:
a. Access to capital at high rate;
b. Efficient access to capital versus raises through debt, which comes with a cost;
c. The ability to move business forward at a more rapid rate;
d. Higher visibility to attract talent (rewards to high performers are enhanced);
e. Flexibility to trade shares, which may be critical to an exit strategy for founders; and
f. Creditors and customers have built-in assurances of long-term relationships.
In contrast, Berndt notes there can be just as many or more cons, including:
a. The demands of constant reporting;
b. Ownership is diluted;
c. Corporate governance not as stringent;
d. Loss of control for founders who generally do not have public skills;
e. Higher regulatory scrutiny and reporting and more scrutiny from investors;
f. Non-financial reporting, including environmental, social, and governance (ESG) reporting; and
g. Costs will vary but assume $2–$3 million or more in additional fees running up to the listing.
According to Matzke, the access to capital markets and liquidity for investors brings new capabilities. “People who have been with the company for a long time, and perhaps have some ownership or stock options, are rewarded by having access to convert a portion of that ownership into cash if they choose,” he states. “Then, when the company needs additional capital for growth, the public markets allow access to significantly more capital.”
On the other hand, the company may lose its entrepreneurial culture as employees adjust to being part of a public company with more regulation and oversight. “There will be significant time demands on the accounting and finance teams to establish and follow internal controls and processes, and tighter timelines for closing the books, records, and quarterly reporting results to external investors,” Matzke says. “In addition, there are significant costs needed to get this infrastructure in place and to maintain it.”
3. Don’t fear transformation
Given the many benefits, those who engage in successful IPOs usually approach the journey as a welcome transformational process. An IPO can and should be more than just a financing event; it is an opportunity for an organization to mature and finally shed that new-kid-on-the block status, which might be helpful at first but as a company grows, it’s not a moniker worth holding onto. The number of investors and owners of the company significantly increases after going public, and with that comes more oversight, governance, and regulation.
“The company will also need to start thinking about new processes and procedures, such as building an internal or external investor relations team, an expansion of the company’s financial reporting team, as well as potentially a treasury manager and an internal audit team,” explains Matzke. “However, the biggest challenge is to maintain the entrepreneurial spirit that drove the company to success and brought it to the point of an IPO.”
For some companies, the transformation is more dramatic and impactful than others, Martin says, and the degree of impact depends on the company’s leadership, structure, history, and capabilities of the business prior to going public. “Going public can be very challenging, but it also could be a very rewarding experience for both the company from a process improvement standpoint, and it can be very rewarding for the individuals at the company who are involved in the process. Often employees are hesitant to embrace change, but an IPO process can really bring about change that allows for business effectiveness to increase, accountability, and reporting improvements.
“It provides opportunities for employees to develop their skills through learning and development opportunities, doing some things and seeing and working with folks that they maybe haven’t in the past,” Martin adds. “So, the work of going through an IPO is hard work for companies, but going through the process can really be worth the effort.”
Not only can an IPO provide an opportunity to cash out for equity owners, it enables businesses to achieve other goals. A higher public profile can be helpful in the marketplace, Martin notes, but while organizations must be prepared for the required effort, timeline, and cost, hard work comes with great rewards. For example, improved reporting can lead to a better understanding of the business and help reduce costs.
The accounting setup, given the necessary organizational structure and depth of talent needed, includes a handful of core functions, starting with accounting. Prior to going public, organizations also need a treasury management function, an investor relations function, financial planning and analysis personnel, and an attorney well versed in Securities and Exchange Commission (SEC) compliance issues.
In most cases, the IPO journey usually takes over one year and sometimes as long as two years. From an accounting and finance perspective, a company should recruit and hire experienced accounting and finance employees such as the chief financial officer and controller, and bring on advisors that have experience with Public Company Accounting Oversight Board (PCAOB) requirements to help build out the necessary internal control processes and structure.
“This also includes assessing all aspects of the company’s accounting to ensure that accounting policies are in compliance,” Matzke explains. “Companies will need to hire an audit firm that is registered with the PCAOB to conduct annual audits and quarterly reviews. From a tax perspective, the company should assess and mitigate any operational tax risk and implement an effective tax governance structure and control framework.”
Valentyn advises more infrastructure in terms of an investor relations team or a larger legal team simply because the reporting requirements of a public company call for more resources and people. “On a cultural level, I would say that the larger amount of scrutiny and just transparency and more eyeballs that are associated with being a public company would be a culture shift for a lot of companies,” he states. “Given the opportunity for an activist investor to identify your company and try to change the broader management decisions, that possibility is something that has an effect on a company that was previously private and doesn’t have that same public level of scrutiny.”
Assembling a talented team of advisors with acumen in accounting can not only help comply with new financial reporting standards, but also help with governance from internal controls to the formation of a board of directors. The board, in turn, can advise management on the proper investor relations strategy because would-be investors look at metrics such as revenue and profitability, cash flow, debt-to-equity ratios, and return on equity. They also look at non-financial objectives such as brand strength and a commitment to ESG reporting.
While there is no shortage of attorneys, finding accountants is a big challenge as fewer certified public accountants graduate from college, Martin notes. The shortage has reached the point where publicly traded companies have actually blamed their lack of timeliness with regulatory filings on the shortage of CPAs. Publicly traded companies need accountants, large private companies need them, and needless to say, accounting firms need them, and it’s a trend that is likely to continue in the foreseeable future.
4. Face the reporting music
These new structures, and the personnel that will administer them, will be responsible for adhering to increased reporting requirements, including the Sarbanes Oxley Act of 2002, a law that made sweeping changes in response to the Enron accounting scandal that resulted in substantial financial losses for institutional and individual investors.
In the process of building toward a public listing, organizations should be building governance around how they will attest to the financial statements they release as a public company, and the internal governance programs they build around a board of directors should prepare this group to serve as fiduciaries for future shareholders.
Once an organization is public, it has several layers of SEC compliance. As company executives meet with would-be investors, they must ensure that all investors have access to the same amount of information and they must understand the level of transparency required to give investors a fair opportunity to understand a company’s risks and opportunities. In exchange for that transparency, public companies get increased liquidity — access to capital in larger amounts — and in a more timely fashion than non-publicly traded companies.
Industry by industry, companies offer different forms of guidance, and disclosures on a quarterly basis usually are segmented into three parts: 1) what happened financially in the last reporting period; 2) a management discussion of ongoing risk factors and trends that are material to their business; and 3) forward-looking statements that accompany the first two. Generally, all quarterly financial disclosures have some flavor of all three, and while the SEC has fairly prescriptive ways to disclose what happened and where you see things going, there is more latitude about guidance.
What public traded businesses are mandated to guide is quite diverse and depends on how a listed company is traded, its ownership, and how many equity analysts follow the company. Some offer guidance in the form of earnings per share (EPS) with a quarterly or annual target, but some firms don’t offer guidance at all. Others choose to offer investors very specific guidance on what they expect for earnings or dividend payouts.
In addition, there are equity analysts who may or may not write on a given stock and expect the completion of certain forms such as the 10-Q, a comprehensive, generally unaudited report of financial performance that must be submitted quarterly by all public companies to the SEC. They also have a quarterly earnings call where equity analysts will attend and ask management pointed questions about past performance, future expectations, and other matters relevant to shareholders and potential investors.
Since public companies are more liquid, in part because there is more transparency, they also are susceptible to takeover overtures, whether friendly or hostile, and that is simply a byproduct of being publicly traded. Sometimes, those shareholders are the aforementioned “activist investors” who own a meaningful number of shares and might demand that the organization value societal goals such as promoting DEI or otherwise believe the CEO is not maximizing shareholder value because of certain practices or the lack thereof. It’s something that a publicly traded company is exposed to that a privately owned company does not have to worry about.
One of those societal factors is a commitment to environmental, social, and governance (ESG) criteria. While this practice has fallen out of favor in some industries, others still advocate it and some publicly traded companies still very much believe in, for example, telling their environmental story and explaining how that translates into shareholder value.
For publicly traded companies, non-financial reporting is required, Berndt notes, and despite the controversy surrounding it, he says ESG is actually growing based upon increased scrutiny from certain investor classes. “I do not think this is going away,” he states.
ESG reporting rules continuously evolve. There are some rules, such as greenhouse gas emissions and other climate rules, that are currently spelled out as reporting requirements starting in 2025, although the SEC recently announced that it would stay implementation of the final rules pending the results of certain legal challenges. “Considering that so much of this is up in the air right now,” Matzke notes, “it’s probably best that a company doesn’t over commit or over promise anything in this area.”
5. List leaning
In addition to domestic stock markets, there are hundreds of global stock exchanges and listing options for businesses engaged in foreign trade, and each come with their own regulatory environment and initial and ongoing costs. Domestically, the Nasdaq is home to growth-oriented digital, biotechnology, and other technology companies that are considered cutting edge or even bleeding edge, while companies on the New York Stock Exchange (NYSE) typically are more stable and well-established.
There are very specific minimum requirements that the Nasdaq and the NYSE each have to be listed. One guiding question to ask is: Where are your peers listed? “Historically, the NYSE has always had the largest total market capitalization of companies listed, while the Nasdaq allows a far larger number of companies to be listed, particularly those that may be too small to meet the requirements of the NYSE,” Berndt explains. “The Nasdaq also has far lower initial listing fees [$50,000–$75,000] than the NYSE [$300,000].”
Stamp of approval
The success rate of IPOs isn’t encouraging, as 80% of companies that go public are unprofitable when their make their debut, but many that bomb at first eventually become profitable, sometimes highly profitable. Whether or not your company is among the 20% that have a boffo opening act as a public company, there are reasons to take a bow.
Valentyn notes that along with public awareness, companies have a certain stamp of approval if they’ve gone through the IPO process and made the cultural, financial, and process improvements that often come with it. “If you’ve gone through the scrutiny that customers or investors or potential partners value, that means everything’s out in the open,” Valentyn states. “There’s a trust factor for a company that goes public, and while there are exceptions to that, generally it’s favorable.”
