Being ready to go public preserves optionality
The recent slowdown in initial public offerings (IPOs) and current economic conditions may have caused retailers to de-prioritize any preparations to go public. However, now is the time to prepare and assess your team, processes and approach to develop your roadmap.
For retailers that have managed through the pandemic well-positioned to grow, now is the ideal time for leaders to review company operations in anticipation of a possible public offering. If you observe a traditional retail fiscal year, the early months of 2023 may be especially timely as you close out one fiscal year and set your priorities for the next fiscal year.
Many retailers have undergone operational transformations that they may want to leverage through the liquidity that an IPO facilitates. They’ve improved supply chains, revamped operations and elevated omnichannel and ecommerce capabilities. As a result, these retailers could see stronger valuations and significant opportunities in the near future. Grant Thornton National Retail Leader Kevin Kelly notes, “The strong retailers aren’t only surviving. They’re thriving.” In other words, they are precisely the kind of companies that could go public when financial market conditions improve. Retailers seeking additional liquidity to grow the business even more may consider doing so through an IPO, which is another alternative to enhance liquidity rather than taking on debt, especially given the current interest rate environment.
The implications of economic uncertainty
Retailers should not bet on a slow IPO market forever. Uncertainty, by its very definition, means that the economic climate could change very quickly. It’s an indication of volatility, not sluggishness.
And there is some evidence that funding entities are poised to make IPO-related moves. Grant Thornton National Managing Partner Accounting Advisory Services Jason Pizza pointed out that special purpose acquisition companies (SPACs) that haven’t yet closed any deals to take companies public are motivated to do so. The failure to complete deals — the purpose of a SPAC, after all — will trigger a premium on the stock price and the CEO’s reputation will suffer if they are perceived as ineffective. But while SPACs will drive most short-term deals, traditional public offerings will become dominant long-term, particularly because only 78 SPACs were created in the first three quarters of 2022, compared to 444 in the same time period in 2021. Consequently, Pizza doesn’t foresee as much SPAC activity long-term after the existing ones expire with a trend moving more toward traditional-path IPOs.
An IPO readiness exercise sets up retailers to preserve optionality, including seizing mid-term SPAC opportunities. “Preparation enables you to go into the second half of 2023 confident,” Pizza said. “If markets turn, or if the proclamations of a recession are overblown, leaders can act decisively while others scramble frantically. We could see a very radical change in the markets by mid-2023.”
Prepare, to succeed
It’s important to distinguish between the public offering itself and preparing to successfully execute an IPO. The preparation consists of a thorough evaluation of your key business functions and related internal control environment. While this has obvious benefits for companies that then actually go public, it also benefits those that decide to wait. The information they glean, and the changes they make, will strengthen their operations and control environment in foundational ways.
“By conducting an IPO-readiness exercise, leaders gain visibility into gaps in underlying processes that you will want to address whether you go public or not,” Kelly said.
Kelly added that the current lack of a rush to go public is an opportunity. “Retailers might have more runway to get themselves ready so that it's not an absolute fire drill if a decision to go public is made. They can prepare in a very thoughtful manner.”
A focus on fundamentals
A successful IPO readiness checklist includes a review of five key areas:
- Accounting and financial reporting
- Governance and SOX (Sarbanes-Oxley Act) readiness
- IT, including cybersecurity
- Tax compliance, reporting, and structuring
- Human capital and ESG readiness
Pizza said checking the readiness of a company’s accounting and financial reporting should involve performing a gap assessment to identify where improvements can be made. They provide important insights into the integrity of decisions or operational and financial readiness as well as the effectiveness of controls.
Cybersecurity should be a top concern for all retailers given the greatly increased dependence on online sales and potential reliance on third parties. ESG is another important area in retail, where, besides its intrinsic ethical value, it can be a significant factor in attracting and retaining values-driven consumers and young talent.
But, while IPO readiness assessments set up retailers to seize opportunities, Kelly reinforced the notion that the benefits of such work are foundational. “Ultimately, businesses want to run in an efficient and well-controlled manner, whether they are public or private,” said Kelly. IPO readiness preparations shine a light on the company’s internal control and governance environment and help provide a roadmap to the future. When you get the call, will you be ready?
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