IPO Archives - MGO CPA | Tax, Audit, and Consulting Services

5 Reasons Your Private Company Should Adopt Public Company Controls

Key Takeaways:

Implementing public-company-level internal controls early on can help your private company prepare for a potential IPO or acquisition, ultimately reducing the risk of adverse disclosures and easing your transition.
Private companies experiencing fast growth can benefit from stronger controls to prevent fraud and other errors, so that financial data remains reliable no matter how big they scale.
If you enhance your internal controls, you can increase your credibility with investors, banks, and other stakeholders — potentially lowering costs and adding financial security.
If you are in an industry with public peers or high security standards (like utilities or tech), you might benefit from adopting similar control measures to maintain competitiveness and stakeholder confidence.

Often viewed as a “public company problem,” private organizations may want to consider implementing internal controls similar to Sarbanes-Oxley (SOX) Section 404 requirements. The inherent benefits of a strong control environment may be significant to a private company; they enhance accountability throughout the organization, reduce risk of fraud, improve processes and financial reporting, and provide more effective engagement with the board of directors.

While not always smaller, private organizations often have limited resources in specialty areas, including accounting for income tax. This resource constraint — with the work being performed outside the core accounting team — combined with the complexity of the issues means private companies are ideal candidates for, and can achieve significant benefit from, internal controls enhancements.

Thinking ahead, there are five reasons private companies may want to adopt public-company-level controls:

Initial Public Offering (IPO) — Walk before you run! If the company believes an IPO may be in its future, it’s better to “practice” before the company is required to be SOX compliant. A phased approach to implementation can drive important changes in company culture as it prepares to become a public organization. Recently published reports analyzing IPO activity and first-time internal control over financial reporting (ICFR) assessments reveal that adverse disclosures on internal controls are three times more likely to be made during a first-time assessment. Making a rapid change to SOX compliance without proper planning can place a heavy burden on a newly public company.
Private Equity (PE) Buyer — If it is possible that the company will be sold to a PE buyer, enhanced financial reporting controls can provide the potential buyer with an added layer of security or confidence regarding the company’s financial position. Further, if the PE firm has an exit strategy that involves an IPO, the requirement for strong internal controls may be on the horizon.
Rapid Growth — Private companies that are growing rapidly, either organically or through acquisition, are susceptible to errors and fraud. The sophistication of these organizations often outpaces the skills and capacity of their support functions, including accounting, finance, and tax. Standard processes with preventive and detective controls can mitigate the risk that comes with rapid growth.
Assurance for Private Investors and Banks — Many users other than public shareholders may rely on financial information. The added security and accountability of having controls in place is a benefit to these users because the enhanced credibility may affect the organization’s cost of borrowing.
Peer-Focused Industries — While not all industries are peer-focused, some place significant weight on the leading practices of their peers. Further, some industries require enhanced levels of security and control. For example, utility companies, industries with sensitive customer data (financial or medical), and tech companies that handle customer data often look to their peer groups for leading practices, including their control environment. When the peer group is a mix of public and private companies, a private company can benefit from keeping pace with the leading practices of their public peers.

Private companies are not immune from intense stakeholder scrutiny into accountability and risk. Companies with a clear understanding of the inherent risks that come from negligible accounting practices demonstrate the ability to think beyond the present and to be better prepared for future growth or change in ownership.

How MGO Can Help

We offer a comprehensive approach to internal control implementation, personalized to meet your private company’s unique needs. Our team’s experience in audit, risk management, and advisory can help your business establish robust controls that enhance accountability, reduce fraud risk, and prepare for the future — whether that looks like growth or a public offering.

Whether you are preparing for an IPO, meeting private equity expectations, or merely enhancing your operational efficiency, our team provides the guidance and the tools needed to help you navigate any complexity with confidence. To learn more about how we can assist your business, reach out to us today.

Tech IPOs: Steering Clear of Common Pitfalls on Your Path to Becoming a Public Company

Key Takeaways:

For tech founders, taking a company public can provide significant benefits like increased capital, visibility, and liquidity, but the process is complex and comes with risks, such as increased regulatory scrutiny and reduced control.
There are several common pitfalls to avoid during the IPO journey, including underestimating timelines, not building a strong financial foundation, and not having the right leadership in place.
Tech companies should focus on a few things to facilitate post-IPO success as a public entity: investor relations, internal controls, and cultural shifts. These maintain trust and compliance across the board.

For many tech founders, the prestige and promised rewards of taking a company public are strong motivators to pursue an initial public offering (IPO).

But IPOs, however attractive, are extremely complicated and can be overwhelming — especially if you’re not a transaction expert and have never navigated the full process. Without the right information, tech founders are liable to experience delays, derailments, and disappointments on their road to an IPO.

Are you a tech founder looking to IPO for the first time? Read our guide to understand what the IPO process looks like for tech companies like yours — and what pitfalls you’ll need to avoid along the way.

Should You Go Public?

While an IPO can be a great avenue to grow your business, it isn’t the right strategy for every company — or every founder. To make an informed decision, you need to understand the benefits and drawbacks of pursuing an IPO.

Benefits

Increased access to capital. An IPO can offer a massive influx of capital, enabling substantial, accelerated growth.
Greater visibility. Going public can improve a tech company’s market visibility and credibility, which can in turn improve brand reputation and recognition.
Increased liquidity for shareholders. An IPO allows early investors to cash out, while stock options remain an incredibly attractive incentive for many employees, even during times of market volatility. The stock options unlocked by an IPO can be key to attracting and retaining top talent.
Access to a market valuation. Being listed on the stock market means the public markets offer a valuation of the tech company, which may be seen as more objective and credible than a privately sourced valuation.

Drawbacks

Greater regulatory and compliance requirements. Publicly traded tech companies are subject to more regulatory and compliance requirements than their privately owned counterparts, and the transition to a publicly traded company can cause compliance costs to skyrocket. Public companies also face scrutiny from regulatory bodies like the SEC. Any mistake, like a reporting misstatement, is highly public and can damage the company’s reputation — and stock price.
Less control. Public tech companies must answer to shareholders and regulators, impacting how much control a founder will have over their company. Founders also often find they have less control over their finances after going public, as the IPO process can “lock up” their cash.
Vulnerability to market volatility. Market conditions and other external factors can cause stock prices to fluctuate, whereas private company valuations are more insulated from such forces.
Increased disclosure requirements. Public tech companies have additional disclosure requirements, which means competitors will have access to more information about the company. This dynamic could impact a company’s competitive advantage in the marketplace.

Are You Asking the Right IPO Questions?

Preparing for an IPO means investigating every aspect of your business. Asking the right questions will help you see beyond the obvious to gain an in-depth understanding of how investors will think about your company and how you can set yourself up for success throughout the IPO process.

Ready to get started?

Read This IPO Checklist

Stage 1

IPO Readiness Assessment

A readiness assessment can help you identify gaps or issues that could prevent your organization from successfully operating as a public company. For most tech companies, the readiness assessment will uncover substantial changes required to facilitate a transition to a public company, such as implementing more robust internal controls or developing specialized accounting capabilities in house. BDO recommends clients assess readiness in the following key areas:

Accounting & SEC reporting
Ta
Risk
Technology
Operations
People
Financial planning & analysis

Common Pitfalls:

Failure to develop a compelling story. Before a leader even considers pursuing an IPO, they need to create a narrative that gets potential investors excited about the future of the company. They must define success, determine what metrics will be used to track it, and put systems in place to measure and report on progress. These steps are key to securing investor interest and confidence. Common success metrics for tech companies include annual recurring revenue (ARR), customer retention, the Rule of 40, customer acquisition costs, daily active users, and monthly active users.
Overestimating existing resources. Tech companies often fail to understand what resources they already have and what resources they still need to secure. For example, pursuing an IPO requires specialized skills related to investor relations, treasury, income tax, technical accounting, SEC reporting, and internal controls, which most private tech companies don’t have in house. Failing to conduct a proper resource assessment can lead to a delayed IPO filing, as the company will have to make up ground and secure those resources later.
Lack of IPO experience. As they prepare for an IPO, tech founders should prioritize building a leadership team that includes professionals who have experience taking tech companies public. IPO veterans can help guide the rest of the team through the process while identifying and addressing potential issues before they happen.
Relying on private-company experience. Private tech company founders sometimes underestimate the depth and breadth of the requirements that come with going public. They may even make the mistake of believing that a private company approach will be sufficient post IPO. Instead of relying on what they already know, founders must continuously assess their policies, procedures, and governance structures and compare them to public-company requirements to identify and proactively address gaps.
Failure to protect intellectual property (IP). IP is a major asset for many tech companies and can significantly impact their valuations. Before tech leaders take their company public, they must assess their current protections and deploy tactics like developing a strong patent portfolio to ensure their IP is secure.

Stage 2

Roadmap and Program Management

Once you understand your current state, it’s time to develop a roadmap to guide your transformation from a privately held company to a public company. A strong roadmap will require input from numerous people and functions across the company, as well as reasonable estimates around the time and effort required to meet your objectives. Effective program management is critical to developing your roadmap as quickly and efficiently as possible.

Common Pitfalls:

Underestimating timelines. Tech leaders often underestimate the time needed to prepare a company for an IPO, which can take as long as 18-24 months. A successful transformation depends on a realistic and carefully planned timeline. Attempting to rush the process can lead to expensive and public mistakes like financial misstatements.
Missing inputs. A successful IPO process relies on participation from the full organization. Failing to include specific departments or professionals in the roadmap stage can lead to process gaps that later derail progress. For example, failure to include IT in the roadmap stage can lead to errors when it comes time to upgrade or rationalize back-office technology in advance of the IPO filing.
Lack of a change management plan. Poor change management can lead to unnecessary disruption. For example, lack of a change management plan can create employee discontent during the transition, causing the company to lose key talent and disrupting operations at a crucial juncture.

Stage 3

March to IPO

At this stage, your goal is to get ready for the IPO filing, which entails executing your roadmap to prepare your organization to operate as a public company. This is also the point at which you will begin preparing for the IPO filing process itself, including selecting an underwriter, pricing the IPO, and conducting a roadshow.

Common Pitfalls:

Failure to build a strong financial foundation. Tech companies preparing to go public need to review their financial statements to verify they are accurate, audited, and up to date. Many tech leaders opt to review three years of financials, even if regulations allow for fewer, to help bolster investor and regulator confidence. Failure to build a strong financial foundation can delay SEC filings, which may impact filing status and result in expensive fines.
Inadequate pro forma reporting plans. Tech company leaders must vet their post-IPO reporting plans against SEC reporting rules to ensure they will meet all relevant requirements. They must also design a comprehensive reporting process, building in checks and balances to ensure all numbers are accurate.
Misaligning compensation structures. As tech leaders revisit their compensation structures, they must make sure that compensation plans don’t conflict with shareholder interests. For example, option-based compensation for CEOs can encourage excessive risk-taking behavior that may damage customer relationships and firm performance, decreasing shareholder value.
Skipping the trial run. Tech companies should practice operating like a public company before filing for an IPO. This trial run can help uncover hidden or overlooked issues like a lack of uniform controls and reporting policies. Companies that skip the trial run often find themselves surprised by requirements and challenges post IPO, which can take significant time and money to address.

Stage 4

Post-IPO Support

After the IPO has been filed, it’s time for your tech company to start operating as a public company. At this stage, you need to ensure you are delivering on your promises, managing expectations with your new shareholders, and meeting your new reporting requirements as a public company.

Common Pitfalls:

Lack of forecasting capabilities. As private companies transform themselves to prepare for an IPO, they need to adopt strong revenue forecasting capabilities. Unfortunately, newly public tech companies often struggle with revenue forecasting, which can cause investor distrust and reputational damage.
Failure to maintain investor relations. Investor expectations will expand after going public, as shareholders await regular updates on company performance. Failing to build strong relationships with investors through proactive, comprehensive communication can breed mistrust.
Failure to manage the cultural shift. When private tech businesses transition into public companies, a major cultural shift often follows. Failure to manage that shift correctly can lead to employee dissatisfaction and talent retention issues.
Poor internal controls. Once a tech company goes public, it will have to comply with new reporting requirements and regulations, notably Sarbanes-Oxley (SOX). Prior to filing the IPO, the company should have all necessary internal controls in place — without them, the company may experience issues like material misstatements that can negatively impact stock price.

How MGO Can Help

There’s no question that going public is an exciting “next step” in your company’s evolution. With an IPO comes additional opportunities to transform the business, but it can also come with more challenges. MGO’s team is here to support you at every stage, from IPO planning and readiness assessments to execution and post-IPO acquisition services.

With today’s rapidly evolving technology, you want to stay at the forefront of developing products that transform how we work, think, and engage with the world. Reach out to our Technology team today to find out how we can help you achieve your goals.

How to Prepare Your Tech Company for a Financial Audit

Key Takeaways:

A financial audit is crucial for tech companies seeking investment or acquisition, providing credibility and insights into financial health and processes.

Proper preparation involves assembling the right team, establishing solid financial systems, and gathering comprehensive documentation.

Approaching the audit as an opportunity rather than an ordeal can lead to stronger financial practices and a clearer path toward business objectives.

You have taken your tech company to the next level with a groundbreaking idea and compelling vision. Now, you are eyeing the next big move — going public, courting major investors, or positioning for an acquisition. But innovation alone will not seal the deal; you need a captivating financial story that stands up to public scrutiny and due diligence.

Enter the financial audit. A well-executed financial audit can be a powerful tool for your business, providing credibility to investors and partners while offering valuable insights into your financial processes. With the right preparation, you can transform an audit from a perceived hurdle into a launchpad for your next phase of growth.

Understanding the Goal of a Financial Audit

A financial audit is an independent examination of your company’s financial statements and underlying records, conducted by a certified public accountant (CPA) or CPA firm. The goal is to provide reasonable assurance that your financial statements are free from material misstatement and fairly represent your company’s financial position.

For tech companies eyeing future fundraising, acquisitions, or public offerings, an audit is more than a compliance exercise — it is a crucial step in telling your financial story accurately and building trust with potential investors or acquirers.

Building an Audit-Ready Foundation

Your audit journey begins long before the auditors arrive. Set your business up for success by having these elements in place:

Human resources: Staff your team with personnel who have solid financial accounting backgrounds. Their knowledge will be essential in maintaining accurate financial records and complying with relevant accounting standards.

Internal systems: Implement accounting platforms to accurately track transactions, inventory, and sales. An efficient accounting system will streamline the process of gathering and presenting financial data.

Formation documents: Maintain comprehensive records from your company’s inception with complete capitalization tables, including intellectual property (IP) documentation. This will make all foundational aspects of your business well-documented and easily accessible.

Legal support: Engage an attorney knowledgeable in your industry to help protect your IP. They can also assist with contract reviews and regulatory compliance, which are often scrutinized during an audit.

Regular period closes: Establish a routine for closing your financial periods (monthly or quarterly) to keep your books consistently up to date. This practice will facilitate the audit process by providing timely and reliable financial information.

Assembling Your Audit Team

Choosing the right team is critical to how efficiently your audit is conducted. Selecting your external team typically includes:

CPA firm: Choose a reputable CPA firm with experience in your industry and the ability and resources to grow with your entity. A CPA firm with relevant industry experience will have a better understanding of the specific challenges and requirements of your business.

Investment banker: Depending on your transaction type, you might need an investment banker. Investment bankers can provide valuable insights and assistance in structuring and executing your financial transactions.

Specialized attorney: If planning for an initial public offering (IPO), engage a Securities and Exchange Commission (SEC) attorney. An attorney will help in navigating the complex regulatory requirements associated with going public.

Unrecognized transactions or errors: These may require significant time to research and correct. Proactively reviewing, identifying, and addressing any unrecognized transactions or errors early on will help in avoiding delays during the audit.

Timeline and Planning

Establish a realistic timeline for your audit and subsequent transactions. A well-planned timeline will help in managing the audit process so that all necessary steps are completed on time.

Audit duration: Allocate at least one to three months for the audit process, factoring in elements like company size and complexity, quality of accounting records, and completeness of your documentation.

Public offering timeline: Keep in mind that going public can take at least three months, and unexpected issues can cause delays.

Regular reviews: Regularly review your timeline with your service providers to adjust, as necessary.

Gathering Your Documentation

The success of your audit hinges on the quality and completeness of your documentation. From the C-suite to your front-line employees, all your documentation needs to be up to date and accurate. Prepare:

Financial statements: Have your income statement, balance sheet, and cash flow statement up to date to accurately reflect your financial position. Accurate financial statements are essential in providing a clear picture of your company’s financial health.

Supporting schedules and notes: Prepare detailed breakdowns of major accounts and transactions, along with explanatory notes for complex items. Supporting materials provide additional context and clarity to your financial statements.

Internal controls documentation: Compile documentation of your financial policies, procedures, and risk assessment activities. Internal controls documentation demonstrates your company has effective processes in place to manage financial risks.

Contracts and agreements: Gather all significant contracts, including customer agreements, vendor contracts, and loan documents. These documents provide evidence of your company’s legal obligations and financial commitments.

Tax filings and records: Have your tax returns and related documentation ready for review. Tax filings and records are essential in verifying your company’s compliance with tax regulations and identifying any potential tax liabilities.

Common Pitfalls (and How to Avoid Them)

Be aware of potential challenges that can delay your audit:

Complex transactions: Tech companies often deal with complex financial instruments like preferred stock, stock options, or convertible instruments. Proper accounting for these is crucial. Equip your team with the necessary knowledge to handle complex transactions.

Revenue recognition: Follow appropriate guidelines, especially for Software as a Service (SaaS) companies where revenue recognition can be complex. Accurate revenue recognition is critical in providing a true and fair view of your company’s financial performance.

Inadequate documentation: Lack of proper documentation can significantly slow down the audit process. Have all required documents complete and readily accessible to avoid delays.

Best Practices for a Smooth Audit Process

Once the audit begins, your role shifts to facilitating the auditors’ work. Your team can contribute to the speed and efficiency of the audit by employing these practices:

Respond promptly: Provide requested information and documents in a timely manner. Delays on your end can derail the entire timeline.

Maintain open communication: Be transparent with your auditors about any issues or concerns.

Stay focused on your objectives: Remember the audit is a means to an end — whether that is preparing for an acquisition, going public, or attracting investors. Keep this perspective to maintain a positive attitude throughout the process.

Embracing the Audit as an Opportunity

Your financial audit doesn’t need to be a stressful ordeal. By approaching it with thorough preparation, open communication, and a focus on your long-term objectives, you can turn this process into a valuable opportunity for growth and improvement.

Remember, the goal is not just to get through the audit — it is to emerge with stronger financial practices, increased credibility, and a clearer path toward your business objectives. With the right mindset and preparation, your audit can be a pivotal step in your company’s journey to success.

How MGO Can Help

We have extensive experience working with tech companies, including serving as the auditor for companies preparing for IPOs, mergers, acquisitions, and other capital-raising activities, as well as tech companies that need an annual audit for a bank or investor.

Our approach includes:

Rapid response times: Echoing our firm’s fundamental “Be a Fanatic About Response Time,” we prioritize quick response to all your requests.

Automated processes: We integrate automation into our audit process to minimize the burden on your team.

Network of resources: We can help connect you with attorneys, investment bankers, and other professionals to meet your needs.

If you need assistance preparing for your financial audit or an experienced auditor who understands your needs, reach out to MGO today. We are here to support you in achieving your objectives and guide you through a successful audit process.

SPAC Listing, Sharp Slowdown in U.S., Authorities Strengthen Surveillance

There has been a significant decline in initial public offerings (IPOs) of special purpose acquisition companies (SPACs) in the U.S. (the share of U.S. SPAC procurement in the world’s total IPO has shrunk from 45% to 10%). This is primarily due to the SEC strengthening its surveillance to enforce investor protection and prevent falsehoods in the earnings outlook. However, regular IPOs are excelling—the world’s funding from April to June, excluding SPAC, was at a record high for those months. It’s important to also note that the listing of SPACs outside the U.S. is increasing in Europe. It is expected that the market’s evaluation of SPAC will eventually be fixed.