Although energy executives can’t control some factors that influence the IPO market — like economic conditions, global turmoil and interest rate changes — they certainly have the power to ensure their company’s readiness for the big event. Creating a scalable infrastructure well before a public offering not only helps private companies manage growth and thrive in a highly regulated environment, but it also ensures a smooth transition by imposing a diligent, sequential preparation regimen.
“Building a strong, scalable infrastructure helps private energy companies handle the growth that accompanies public registration in a well-managed, compliant fashion,” says Alyssa Martin, executive partner in advisory services at Weaver.
Smart Business spoke with Martin about the steps executives should take to proactively prepare their private energy company for an IPO.
Why is creating a scalable infrastructure the top priority?
You’ll crash if you try to build the airplane once you’ve left the ground, so energy executives need to proactively prepare their company for future growth by uniting people, process and technology to create a scalable infrastructure. Of course, it’s important to assemble an upper and middle management team of veterans with energy experience and public company expertise, but preparing for the event in an organized manner is vital, particularly in private companies that may have limited staff and resources. Otherwise, your team can become overwhelmed with trying to juggle their regular duties with a hefty list of complex, pre-IPO tasks.
A best practice is for senior management to create a roadmap to shepherd their staff through the daunting IPO preparation process, as well as enhance the private company foundation to become a company that is publicly fit.
What are the first steps in the IPO preparation process?
Start by enhancing your financial reporting capabilities so you understand the key critical risks and key performance indicators that drive the business. Timely, accurate and usable financial reports allow you to make informed business decisions, meet shareholder expectations and prepare accurate disclosure statements. In addition, the data will help you analyze trends and craft a strategy so you’re ready to answer questions from underwriters, attorneys and auditors.
These experts want to hear the story behind the numbers, including a description of the factors that drive the business up and down. They also want assurances that the company has the necessary procedures to comply with the regulations imposed on public companies.
Creating robust procedures is the next step because they emanate from the financial reporting system. The procedures will help you spot and report changes in control and material contracts, since public companies must demonstrate that they can comply with SEC reporting rules and stay ahead of disclosure requirements by creating a warning system that alerts them to reportable activities.
Once you have enhanced the financial reporting process and created robust procedures, its time to undergo a comprehensive risk assessment. A facilitated risk assessment not only helps your company comply with regulations like Sarbanes-Oxley, the risk analysis and response plan also allows your team to view the entire risk portfolio, agree on the priorities, and tackle mitigation and other related tasks in a logical manner.
It’s important not to overload employees during the IPO preparation or the early stages of implementing public company standards, since people can only initiate and absorb so much change at once.
How can private companies prepare for an IPO by instituting corporate governance practices?
Using external consultants to assess risk, conduct gap analysis and implement procedures helps private energy companies evolve from being lean, internally driven organizations to substantial, regulatory-driven public companies. Policies tend to be unstructured and undocumented in private energy firms, but internal audit consultants working under the direction of an audit committee can help institute written procedures and documentation guidelines.
This provides employees with a chance to form new habits and comply with governance practices well before an IPO.
How can private companies strengthen internal controls and IT systems?
In private companies, risk is usually managed at the process level based on comfort with the employee base. In public companies, it must be managed at the enterprise level first and then balanced through controls at the process level to comply with the strict guidelines for business operations and Section 404 financial reporting requirements.
Accordingly, it can take 12 to 24 months and a hefty financial investment for private companies to adequately strengthen their internal controls and IT systems to meet public company standards. Have internal audit consultants assess your internal controls, highlight areas of potential risk and provide recommendations for improvement. Then start early, so your IT staff has the bandwidth to implement the required changes while performing their regular duties.
Finally, facilitate a smooth transition by building control components into each step as you navigate the public company requirements.
Do you have any other tips to help energy executives prepare for an IPO?
Seek outside assistance and guidance before embarking on the journey from private to public status. External consulting experts who have travelled the path and understand your industry can help you navigate the process and reduce the chances of a false start. Prevent errors, costly rework and stress by tackling each step in the process logically and sequentially.
Finally, create a scalable infrastructure so your company is ready to handle the growth that accompanies public status.
Alyssa Martin, CPA, MBA, is an executive partner in advisory services at Weaver. Reach her at Alyssa.Martin@WeaverLLP.com or (972) 448-6975.
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