If a modern-day Rip van Winkle had fallen asleep in January last year, he or she would have awakened to quite a lot of news. The pandemic—obviously—would be the biggest. In the financial world, it likely would have been the renewed interest and surge in “blank check” companies, also known as special purpose acquisition companies (SPACs).
SPACS are an unexpected and welcome development, which coincided with the increased size of private equity markets and the need for liquidity for investors and management in a year that’s seen more than its share of bankruptcies, unemployment and recovery worries.
How do they work? Essentially, SPACs raise capital through an IPO with the sole purpose of acquiring an operating company within 18 to 24 months after going public. Once SPAC shareholders approve acquiring the intended target, that targeted operating company merges into the SPAC and—voilà—a new publicly traded company is born.
SPACs’ recent rejuvenation has generated interest with private companies looking to raise capital via the public market. If you’re a private company looking to embark on this path, keep in mind the journey is significantly faster (compared to a traditional IPO), although you’ll need to prepare for potential challenges along the road to become a public company ready to meet shareholder and market expectations on Day One. Think of it like going from talented community theater straight to Broadway—with no performances in between. Be ready for a tough crowd. And possibly critical reviews.
Based on our experience working with private companies choosing to merge with a SPAC, management needs to address some critical areas for public company readiness, including the cost to go and be public, as well as operations once underway. Here are just a few items to consider:
Audited Financial Statements
Have your historical financial statements been audited according to Public Company Accounting Oversight Board (PCAOB) standards? Getting your financial house in order is a vital early step and, for some, a painful and time-consuming one, especially when your financial data might not be as robust as expected in a public company model. Not only are you preparing your financials, but PCAOB will also require an audit of your internal control over financial reporting (ICFR).
Adequate Accounting and Finance Team
Do your accounting and finance departments have enough qualified and experienced public company financial resources to meet the rigor of public SEC reporting requirements? Once you’re a public company, your accounting and finance team will need more financial rigor and have more responsibilities than when you were a private entity. They’ll need to produce timely, accurate financial information on a regular basis, including information private companies don’t need to file, such as:
- Segment information
- Non-GAAP measures
- Management’s discussion and analysis (MD&A)
- Compensation discussion and analysis (director and executive compensation)
- Enterprise risk management and other risk factors
- Earnings per share (EPS) calculations
Besides staffing up your accounting and finance team, you’ll also need to add (or co-/out-source) new departments to operate as a public company, including internal audit, investor relations and corporate governance. If not already part of your organization, other functions, including HR, IT, treasury and tax, will also need to expand their responsibilities—often requiring even more resources.
Compliance and Certification (SOX Sec. 302, 404)
Privately held companies are sometimes unaware of just what awaits them in terms of SEC, SOX and other regulatory compliance requirements. Getting each in order is not only required to meet public company financial reporting standards, but also necessary for the CEO and CFO to certify the appropriateness of their financial statements and disclosures. This step is absolutely critical for senior management because if the company’s books turn out to be inaccurate, CEOs and CFOs could potentially face fines and/or imprisonment.
Not to be overlooked, technology readiness is often underestimated and is key to ensuring your operations can support the requirements to produce timely SEC filings, budget and forecasting, management reporting, and data analytics, as well as operational metrics. Assessing your technology capabilities early will help you prepare for technology projects that can often stretch many months.
Are you ready to absorb the costs of operating as a public company? The points noted above all require investments to set a standard for operating as a public company and will continue as a business-as-usual cost moving forward to enable the entity to continue driving value generation post-IPO. Other costs to budget for include directors and officers liability (D&O) insurance, increased board costs and SEC filing fees, as well as related advisor fees (e.g., legal, accounting).
Growth and Scale
Now that you’re a public company, where does your company go next? How do you plan to use the advantages and capital generated by your new publicly traded status to grow volume and build scale for the enterprise? Today’s old playbooks won’t work tomorrow. You’re now a public company and are held to a different standard with shareholders wanting to see a return on their investment. Now’s the time to assess your company’s operations, identify non-added value activities and efficiencies coupled with growth opportunities, and prioritize initiatives and investments to increase your company’s value generation for the future.
Finally, after 20 years of slumber, the fictional Rip van Winkle woke up in a new world and was amazed by what changes had taken place. Today’s Rip van Winkle needed only a few months to miss SPACs’ unexpected resurgence. But with this new interest should also come a realistic view of what’s actually involved in the whole process. For privately held companies looking to go public, SPACs represent a great opportunity to access additional capital—yet only if done right. There’s a lot of hard work ahead, and you have to be willing to put in the effort. Start your journey with that in mind and you’ve already taken the right first step.