Cost of Going Public Often Underestimated
While the allure of going public may be appealing to a business, new research shows many don't fully understand the costs, time and complexity that come with it.
The study by PwC US found that nearly half of the chief financial officers surveyed with firms that went public in the past several years said the one-time costs associated with their initial public offerings (IPO) had exceeded their expectations. Nearly 90 percent of the CFOs surveyed said their firms spent more than $1 million on one-time costs associated with the transaction.
According to the research, factors impacting the cost of an IPO include 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.
"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," said Henri Leveque, leader of PwC's U.S. capital markets and accounting advisoryservices practice.
The study shows 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.
Overall, financial reporting, regulatory compliance and incremental auditing costs together can account for more than half of the total ongoing costs directly associated with being public, according to the survey.
In addition, public company reporting requirements often require an organization to add employees who possess skill sets a private company does not have. Specifically, 84 percent of those surveyed said their company hired at least one new employee to handle to increase their SEC reporting capabilities, with nearly 30 percent spending more than they anticipated on internal staffing needs since going public.
"Achieving a successful IPO requires connecting many pieces of a complex puzzle, some of which are outside of the control of company management and its stakeholders," Leveque said. "Understanding the extensive mix of direct costs associated with the IPO process and the ongoing costs that are integral to operating and maintaining a public company will increase the efficiency of the IPO and, ultimately, help stakeholders avoid surprises and make the most of the new public company's valuation."
Leveque advises businesses to prepare a detailed analysis of the costs associated with going public and being a public company in order to accelerate the budgeting process and make it more accurate, limit surprises throughout the IPO process and provide organizations adequate time to develop the infrastructure that will support the rigors and requirements of life as a public company.
The study was based on the analysis of 380 IPOs.