Creating a company that attracts millions of customers and eventually goes public is many an entrepreneur’s dream. But the actual costs of just the initial public offering frequently exceeds the a company’s expectations.
A new PwC US survey found that many firms “embark upon the process without a thorough understanding of the costs, time and complexity associated with both going public and being public.”
Facebook’s recent IPO difficulties make it clear that going public is not just one big bell-ringing party.
The PwC survey on managing the costs of an IPO found that 48 percent of participating CFOs with firms that went public in the U.S. in the past several years said the one-time costs associated with their IPOs had exceeded their expectations.
Henri Leveque, leader of PwC’s U.S. Capital Markets and Accounting Advisory Services practice, said companies frequently underestimate costs of an IPO, as well as the time and complexity associated with executing their offerings.
“At the same time,” said Leveque, “it’s critical that companies in the process understand that a successful IPO involves two equally important parallel work streams: going public and being a public company.”
He recommends preparing a detailed analysis of the costs associated with going public and being a public company to accelerate the budgeting process, make it more accurate, limit surprises throughout the IPO process and provide adequate time to develop the infrastructure to support the rigors and requirements of life as a public company.
But the PwC survey suggests many companies are not following that carefully prepared route to an IPO.
Eighty-seven percent of CFOs participating in PwC’s survey indicated that their firms spent more than $1 million on one-time costs associated with the transaction, and as many as 23 percent reported that the costs of taking their firms public had exceeded their expectations by a significant amount.
The survey also revealed that firms are much more likely to be caught off guard by the costs of going public than the ongoing costs of managing a public firm.
The magnitude and scope of IPO costs can vary significantly from offering to offering based on several variables, including the size of the offering, the complexity of the IPO structure and the organization’s readiness to be a public company, according to PwC.
Among the factors impacting the cost of an IPO are direct costs, such as underwriter and printer fees, and certain legal and financial reporting costs, longer-term costs such as capabilities for financial reporting, investor relations and human resource functions, and costs to institute incentive plans for executives.
Based on an analysis of more than 380 IPOs, PwC found that the underwriter discount, legal, accounting, and other offering costs can result in substantial expenditures.
For example, one-time legal fees averaged nearly 25 percent of total costs for IPO transactions that raised less than $50 million, while legal fees comprised 18 percent of total costs for transactions that raised between $100 million and $249 million, according to the survey.
Offering costs exclude those that are not directly attributable to the IPO such as restructuring costs incurred to create the legal and organizational structure needed to execute the IPO.
These incremental organizational costs are typically nonrecurring costs incurred in the months or even years leading up to the IPO. Total incremental organizational costs reported by recently public firms participating in PwC’s survey averaged 42 percent of the total one-time costs, while taking their firms public.
Costs of being public
Then, once a company is public, there are significant expenses associated with being public.
Specifically, newly public companies often incur costs related to increased accounting, financial reporting and investor relations considerations, financial effectiveness, internal staffing needs, SEC reporting, internal audit and technology support.
Financial reporting, regulatory compliance and incremental auditing costs together can account for an estimated 54 percent of the total ongoing costs directly associated with being public, according to PwC.
Public company reporting requirements often require an organization to add and retain employees who possess skill sets a private company does not have. For example, 84 percent of survey participants hired between one and five new staff members specifically to increase their SEC reporting capabilities.
Additionally, an increased focus on financial planning and analysis, internal audit and compliance, legal and technology support results in increased staffing needs for newly public companies. According to PwC’s survey, 29 percent of firms spent more for internal staffing needs since going public than they anticipated prior to the IPO.
While the PwC survey doesn’t address the issue, many companies also don’t seem to realize that once they are public, they will be judged by investors on quarterly reports and investor and analyst expectations.
- Costs of going public include investing in top management & new technology
- Hiring of professionals to stay flat the next three months
- Hiring in professional fields rising in Q2, but at slower pace
- Security concerns limiting use of cloud computing by legal firms
- Your competitors are watching you
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