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This article originally appeared in The Bottom Line, June 2014 edition.
The allure of taking a company public often blinds firms and their account-ants to the reality of an initial public offering and its aftermath.
"Many companies that wish to have an IPO are just not ready," says Cheryl Reicin, a lawyer with Torys LLP in Toronto. "Because of the paucity of venture capital and other private investment in Canada, many companies go public as a last resort and the company story is still not ripe for prime time."
Financial disclosure and awareness are at the heart of an initial public offering, and accountants must understand the implications of going public for both the firm and the finance department. The old way of reporting revenue and expenses may no longer be acceptable. The new way may require many more hours and much more money.
"Many private companies find it challenging and time consuming to prepare and/or adjust historical financial statements to comply with the reporting and disclosure requirements of going public and to meet auditor's standards, especially if they haven't been audited before," said Eric Moncik, a lawyer with Blake, Cassels & Graydon in Toronto.
The finance and management team will need to make changes to their strategic and corporate tax planning, financial accounting and reporting, and internal control systems to signal to the investor community that the company's affairs are in order. It's also important to simplify the company's capital structure by negotiating in advance with those who hold securities with anti-dilution, special voting rights or redemption clauses, as well as splitting or consolidating shares to meet marketing, liquidity and listing requirements.
Equally essential is a review with auditors of the appropriate accounting principles for public issuers, and ensuring that the necessary historical financial information is available to be included in the prospectus.
"Additionally, the company may wish to undertake pre-IPO transactions such as debt financing, corporate reorganization and equity financing, or even undertake acquisitions, alliances or joint ventures to enhance the offering's value," said Moncik.
The prospectus required of all private companies seeking to issue an IPO calls for "full, true and plain disclosure" of all material facts relating to the securities being offered.
"It requires significant work to present the company in a way that reflects both its strengths and weaknesses, its current status and its goals," said Reicin. "Many companies that wish to have an IPO are just not ready. Because of the paucity of venture capital and other private investment in Canada, many companies go public as a last resort and the company story is still not ripe for prime time."
"I find that many companies do not have a coherent story and spin wheels going through many drafts of the prospectus until they get their message down."
Accuracy is essential and the accounting team will want to review the prospectus carefully. The consequences of an error can be significant. "Directors, prospectus signing officers, and certain experts and underwriters may all be open to liability for damages or rescission in the event the prospectus contains misrepresentations," noted Moncik.
This upfront work is only the beginning. Post-IPO, the finance team will be busy and the learning curve will be steep. When a company moves from private to public, they move to International Financial Reporting Standards.
"That can be a daunting task. It isn't cheap," said David Danziger, national leader of public companies with MNP LLP in Toronto. "Most hold-ups are linked to not having financial statements ready and personnel forms completed and submitted. Many of the requirements are time-sensitive."
One of the most challenging tasks will be preparation of the management discussion and analysis, which conveys the reality of a company to shareholders. "It can't be a paint-by-the-numbers exercise," said Clemens Mayr, a lawyer with McCarthy Tetrault in Montreal.
"In this era of increased shareholder activism," he added, "the one common thread we see is deficits in communication with shareholders and the market. It's a culture that needs to be built, understood and implemented long before your IPO is completed. It does not happen overnight."
Before the decision to go public is ever made, senior management must assess whether the company will function well in this new environment and identify the team members essential to future success. "Operating as a public company is all about transparency and disclosure; giving up a company's 'privacy' requires a substantial shift in culture," said Reicin.
Managing expectations will be paramount, and those are formulated with the release of the prospectus, she added.
"The investment community will expect the issuer to perform according to the business plan as set out in that document. Overly optimistic timelines or mile-stones can come back to bite the company and can destroy a com-pany's credibility with the investment community."
Connections with shareholders also need to be built and maintained. This will be a new way of doing business for private companies, and a potential new stressor. "Shareholders are unknown in a public company. For private companies, there is a relationship with shareholders," noted Mayr.
Managing many and diverse shareholders can be problematic, he added. "They may not have the same expectations. The ability of a company to com-municate can make the differ-ence between stability and an angry activist shareholder trying to replace the board."
It is unlikely the expertise, financial and otherwise, that a firm requires to go public will reside within the existing com-pany. Advisors will be needed. So will independence, said Danziger, a chartered professional accountant.
"Maintain control over the process," he advised. "There is a balance between having advisors and exerting control. It can get away from you."
Client Groups:Public Companies
Related Topics:Going Public
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