The IPO readiness trap: Preparing to list without losing momentum

As Mark Twain once observed, “Habit is habit, and not to be flung out of the window by any man, but coaxed down-stairs a step at a time.” The same principle applies to IPO readiness. Preparing a company for life as a public organisation is not a one-off transformation or a project that can be imposed overnight. Instead, it is a gradual process of strengthening governance, enhancing financial reporting, maturing controls, and building the disciplines expected by investors and regulators.

An IPO readiness project done well aids success by preparing a group to navigate the IPO process successfully and succeed as a publicly owned group. But crucially, IPO readiness should enable the business, not distract from it.

When preparing for an IPO, a company’s focus is naturally on the process and the readiness project, but this should not compromise the group’s focus on what made it successful in the first place.

There are three key areas in which tension often arises and mitigation or management strategies are crucial:

• Governance requirements consuming leadership attention

• Controls reducing agility

• Company milestones become focused on compliance, not growth

Given the focus of readiness projects on preparing governance structures that can withstand the rigour of an IPO and public ownership, it is natural for senior management to find their time taken up either on newly formed committees or discussing policy and control developments.

The issue is that much of this is inward looking. It distracts the key decision-makers and entrepreneurs from activities that grow the business. Yet it is the ability of senior management to provide ongoing growth that is being sold to investors.

To guard against this, an IPO readiness project needs to be treated as a programme in its own right, as opposed to a side gig for the team managing operations. Ideally, management may look to staff the project separately. However, given the likely constraints on doing so, more practical options may involve setting up a dedicated team, monitoring the extent to which leadership time is being diverted from growth activities and clearly delineating activities between running and preparing the business.

If the CEO and the leadership team are spending more time on IPO readiness than customers, products and growth, the balance is likely to be wrong.

Controls within a business are a fundamental requirement of good governance. They are required to ensure that a listed group can comply with its obligations as a publicly owned company and give the board and investors confidence that decisions are based on reliable information and appropriately authorised.

At the same time, introducing a wave of new controls risks slowing down processes that were previously instrumental to the success of the business. Whether this relates to speed to market, agility in hiring practices to get the best staff, freedom of innovation or responsiveness to customer demands, it’s likely to feel an impact.

The solution cannot be to do away with controls, but it is important to remain mindful of what they are designed to achieve. A rinse and repeat approach to IPO readiness risks introducing certain controls simply because other listed companies have them, rather than challenging what is really required for the company to comply with its obligations. To help with this, actions that companies might consider taking as part of an IPO readiness exercise include:

Reviewing the risk rating of the process into which controls are being introduced

• Focusing on keeping approvals processes as simple as possible

• Challenging whether the design of controls inhibits efficient decision-making in customer and product facing activities

• Assessing the operational impact of the readiness initiatives to ensure any adverse impacts are understood and mitigated where possible

The aim should be to achieve an environment that promotes maximum control with minimum friction.

If an IPO readiness project hits every governance, controls, reporting and structural milestone, but sees growth momentum stall while management have been focused elsewhere, there are legitimate questions to be asked as to the value of the project.

It is inevitable that a successful IPO readiness project will take up senior management time, and it is important that any changes and lessons learned are embedded within the organisation pre and post-IPO. However, if this comes at the expense of growth due to a slowdown in, for example, product launches and initiatives designed to drive revenue growth, then this risks undermining any IPO ambition as much as any readiness concerns.

To preserve growth alongside preparing for an IPO, a readiness project should ensure that there are metrics established to measure and monitor growth in parallel. Revenue growth, the sales pipeline, customer retention, market expansion and the cadence of product releases are all examples of areas where momentum needs to be maintained. These should be monitored to identify any drop-off throughout the journey towards an IPO.

In practice, such monitoring represents good practice irrespective of the IPO context, but it becomes even more important where specific projects might have an adverse impact.

IPO projects are vital when preparing for an IPO, but consistent with the opening quote, a readiness project typically and necessarily takes place over an extended period of time to embed the right habits within the organisation. Advisers and their clients must guard against the project undermining the fundamentals of success for the business.

One of the best ways of doing this is to avoid taking the “eat, sleep, prepare for IPO, repeat” approach that can come from using an off-the-shelf package of processes and controls. Instead, actions taken as part of IPO readiness should be deliberate and tailored.

Our IPO readiness specialists can help your business to strike the right balance to ensure the route to IPO is followed correctly, without impacting day to day operations.