The IPO process is one of the most important yet complex events that a growing company will go through. From financial scrutiny by investors, auditors, and regulators to continuous collaboration amongst investment bankers, lawyers, and accountants you must be prepared to manage large amounts of information and accompanying analysis.
What is an IPO?
An IPO or “Initial Public Offering” is the process of offering shares of a private corporation to the public in a new stock issuance.
Advantages of an IPO
Often companies choose to enter into an IPO for one or more of the following reasons:
- Increase long-term capital
- Greater access to cash and improved liquidity
- Opportunity for initial founders or investor groups to cash out
- Reward and offer monetization to employees with shares
- Elevating the company’s profile and presence in their industry
If you’ve never taken this road before, there’s a number of steps and obstacles that need to be considered. As legal counsel, it is important to understand the entire IPO process to build a successful strategy. This IPO checklist will act as your roadmap to navigating the complex process and steps yet to come.
1: Hire the Right Team
Choosing the right team of experienced professionals to handle the IPO process is critical for success. The following entities are enlisted by the company to help manage the process:
- Investment Bank: The investment bank serves as the intermediary between the company seeking to issue shares in an initial public offering (IPO) and investors and acts as the underwriter. The bank helps the company prepare for the IPO and are involved in every step of the process including due diligence, document preparation, filing, marketing, and issuance.
- Lawyers: Lawyers play a crucial role in the IPO. The process involves numerous complex federal and state regulatory requirements. Lawyers are responsible for ensuring the transaction is structured to adhere to the law. They are expected to advise issuers, underwriters, and bankers on how to complete the IPO within the regulatory framework. If the SEC, a state regulatory agency, or an investor uncovers violations in any of the filings, the company could face serious penalties. This includes criminal or civil securities fraud charges or the assertion of shareholder rescission rights.
- Service Providers: Ensuring that the right tools are in place to handle the IPO process is critical. IPOs require countless hours of work and collaboration between multiple parties – the firm going public, bankers, lawyers and more. With so many people working with so much sensitive information, a virtual data room platform is often required to host and manage the information sharing and collaboration involved in different stages of process. Virtual data rooms like SmartRoom are ultra-secure and allow IPO-ready companies to control view, print, save, and modify rights across large user bases so that they can streamline communication with key stakeholders while ensuring absolute security. SmartRoom even allows companies to gain insight into investor activity through real-time reporting and analytics. Administrators can see which documents potential investors are most active with so they can plan their strategy appropriately. Features like automated alerts keep stakeholders up to date when new documents are added or when existing documents are edited.
2. Conduct due diligence
The banks, underwriters, and lawyers will conduct an in-depth audit of the entire company, which is known as the due diligence process. The review includes all financial, tax, legal, and IP information, industry and market research, and customer verification. The goal is to gain full transparency into the operations of the company, potential risks, and to assure all claims made in the company’s registration statement are complete and accurate.
3: Develop the IPO prospectus
The company and the IPO lawyers will use the information found in due diligence to draft all principal offering documents, including the IPO prospectus, which must be filed with the SEC as part of the IPO registration statement. The IPO prospectus paints the complete picture of a company, highlighting its strengths, strategy, market share, products, financials, and overall investment opportunities. The prospectus must also provide full disclosure of any potential risks involved for investors, as well as any other mitigating factors. The IPO prospectus is subject to extensive disclosure requirements, so it is paramount that all parties collaborate to ensure the prospectus is detailed and accurate.
4: File the IPO registration statement with the SEC
IPO lawyers are responsible for filing the IPO prospectus and the entire registration statement with the SEC. There is a 30-day review process where the filing is subject to review and comment by the SEC. Once this process is complete, the company will complete an initial listing application with the exchange. Underwriters will then file compensation information for the IPO with the Financial Industry Regulatory Authority (FINRA).
5: Pre-IPO placement
Before the public IPO, the investment bank markets the IPO to private investors to maximize the company’s position. These private investors in a pre-IPO placement are typically large private equity or hedge funds that are willing to purchases a significant volume of shares. The size of the investment means the pre-IPO placement share price is usually less than the prospective IPO price.
6: The IPO “roadshow”
Over the course of several weeks leading up to the IPO, the investment bankers and company’s management team will hold what is referred to as a “roadshow.” The roadshow is a series of presentations marketing the IPO to potential investors and is usually when the offering size and price range for shares is first announced. The goal of the roadshow is to generate interest of potential investors to help drive up the initial sale price.
7: Set share pricing
Based on interest during the roadshow and a variety of other factors, the investment bankers will set an agreed upon price that determines the initial value of each share.
8: Allocate shares and initiate trading
A few days after pricing is set, the IPO will close, and the issuer and any selling stockholders must release their shares to the underwriters. Once all shares are released, the institutional investors who have already purchased shares will get their allocations and public trading will begin.
The IPO process is not any easy one. Understanding the process and implementing a well, thought-out strategy is vital to a successful IPO. There is enormous pressure on all parties involved. One mistake or error made at any point in the process can have serious consequences to the entire transaction. It is important to invest in the right resources to ensure any IPO process your involved in is managed efficiently and securely. With so many different people working with so much information, having a secure, collaborative virtual data room platform where multiple stakeholders can access critical information from anywhere at any time, can make all the difference.
2019’s technological climate manifested by the daily pursuit of increasing, streamlining, and maximizing effort is apparent in every industry from small business food trucks utilizing handheld, portable Point of Sales devices, to Fortune 500 companies employing top of the line software developed for specific use within the company. It is without a doubt completely unavoidable, Private Equity sector is no exception.
Forget the seemingly endless back and forth correspondence, unsustainable spreadsheets, and multiple data platforms of old that have been prevalent in the dealings of Private Equity, technology notwithstanding, as the time has come for a comprehensive solution that delivers regardless of demand.
Long overdue for a singular, fully integrated software has been the status of Private Equity software across the board. This has prompted the attention of any CFO to be on the lookout for a platform that meets the demand for simplistic deal-making processes, data security that could not be understated, integrated cloud data sharing, and affordability.
Enter SmartRoom, the Private Equity technology that PE firms have been begging for. SmartRoom offers a full bundle of software solutions for Private Equity Funds including its next-generation virtual data room, and automated investor reporting and customized investor portal solution. Both of which, are both fully integrated with DealCloud, the only customer relationship management (CRM) platform built exclusively for deal professionals.
This integrated technology allows PE firms to consolidate and streamline deal management and provides greater insight into data, allowing them to negotiate better deals. The surface is only being scratched on what SmartRoom has to offer to the ever-increasing customer and user demands that are prevalent in the fast-paced world of Private Equity.
A CRM Designed Exclusively for Deal Makers
CRM tools (customer relationship management) are gaining increasing popularity across all industries. However, each industry defines its customers differently. This has led to the development of niche solutions that cater specifically to the needs of different types of companies, including PE firms.
These solutions focus on optimizing different stages of the private equity deal process and help firms stay more organized and on-task, particularly through deal sourcing and origination, fundraising and overall management. Firms that use a CRM platform are able to build stronger relationships and networks to use to their advantage, especially as they attempt to secure deal flow opportunities.
SmartRoom has partnered with DealCloud to provide an all-encompassing CRM that was built for deal professionals. DealCloud was designed with deal professionals in mind and equipped for the complexities of Fund Manager relationships. Therefore, this CRM offers an untraditional approach to powering a firm’s deal-making process.
It has never been simpler to access and manage everything in your scope including:
- Proprietary lead sourcing which allows the firm to sort prospective companies by their region, industry, and sector to achieve a better understanding prior to initial contact.
- Pipeline management including interactive dashboards, custom reports, and tools that allow the user to analyze prospering or failing deals with automated reports.
- The ability to fundraise through an integrated and transparent view of investors activity and commitment from limited partners, essential for information that can lead to valuable deals.
- Deal execution management allowing the tracking of every aspect of a deal from associated parties, task assignment to assure teams meet goals and stay on task with planned strategy, and relationship management.
- Provided outreach to investors that offers ease of communication through multiple avenues to assist in properly managing client and investor intel
A Flat-Fee Virtual Data Room for Multiple Use Cases
From fundraising to portfolio company exits, private equity firms are constantly involved in a number of strategic transactions involving due diligence that requires file sharing with many stakeholders. Often times, firms use one-off solutions or multiple silo platforms that add additional steps and inefficient processes to daily workflows.
These jumbled solutions usually involve either generic file sharing applications that lack the critical security features necessary to handle sensitive information involved in these strategic events or multiple data rooms priced per-page that can add up to exorbitant amounts over time.
That is why SmartRoom has developed a next-generation virtual data room solution designed to meet the various needs of private equity firms. The company offers PE firms a flat-fee pricing model that gives them access to unlimited data and rooms, eliminating the price-per-page model. This allows firms to use the platform for multiple use cases and deal activities including:
- Portfolio company exits
- Secure file sharing for each portfolio company
- Add-on acquisitions
- Lender communication
- Portfolio company collaboration.
SmartRoom’s next-generation technology boasts inherit security functionality like custom security profiles, document-level security, and the remote detonation of documents, even after they have been downloaded. It also was built with time-saving features like SmartDrive, a desktop application that allows you to manage data room content directly from your desktop, and advanced reporting and instant notifications; giving firms complete control and insight into all data activity.
Now, SmartRoom’s virtual data room can be integrated into DealCloud’s CRM, giving private equity firms even more insight into strategic events. By integrating DealCloud and SmartRoom, firms can now manage virtual data room invites and security settings directly from the DealCloud CRM. In addition, they can maintain a running record of buyers’ data room activity within DealCloud, allowing them to have insight into buyers’ due diligence behaviors for their next deal.
Automated Investor Reporting Technology
Investor reporting can be a tedious process for private equity firm’s that haven’t invested in a technology solution. Many firms still generate and distribute reports manually, relying on excel spreadsheets and mailing lists that are difficult and time-consuming to manage.
SmartRoom’s Investor reporting and portal solution, SmartLP, is a cloud-based platform that allows funds to automate the customization and distribution of investor documents and then allows investors to access those documents in a secure, centralized portal.
The reporting wizard automates the creation of investor specific reports and then automatically distributes those reports to their secure, designated folders within the investor portal. The tool works by mapping investor information fields in Microsoft Excel with investor documents to create a custom report document for each investor. It can also split a consolidated PDF report into separate investor-specific reports, depending on the firm’s reporting methods.
The investor portal is a fully-customizable cloud-based platform lets investors easily and securely access these documents from anywhere. Firms can automatically invite new users and establish security profiles that control access rights. They can also create automated alerts that instantly notify investors via email that their newest documents are available. The portal is can be pre-configured with the fund’s colors and logo, making it a seamless and intuitive experience for investors.
SmartRoom’s SmartLP is fully integrating DealCloud CRM, so Investor Relations teams can now seamlessly automate the creation and distribution of investor reports by managing user lists, security settings, investor documentation, and more directly from DealCloud. In addition, they can maintain living records of investor communication right within the DealCloud instance. This integration saves valuable time and lets the team focus on more important investor tasks. It accelerates the information sharing process while protecting the interests of all involved parties and is the key to staying organized and connected. With top-level security and an easy automated process, this intuitive online experience will transform LP reporting for the private equity industry.
An Integrated Private Equity Technology Solution
The ability for private equity firms to integrate all their technology, not only streamlines and accelerates information sharing processes, it enables greater visibility into data insights that will give them the competitive advantage in deals and negotiations. A secure, single source of data gives teams more information at their fingertips, and helps firms reduce technology costs associated with multiple solutions.
SmartRooms all-inclusive private equity technology bundle brings exactly what is needed to the forefront of the private equity world solidified by their partnership with Deal Cloud.
When it comes down to the need of a firm that is preparing to invest in a technology that will withstand their highest demands in sharing and collaborating on highly sensitive information, the choice is clear to visit SmartRoom to request a demo and see for yourself the power and reliability of the industries leading private equity management software.
The road to a successful merger and acquisition process, for both sellers and buyers, is arduous and full of bumps, twists and unexpected hazards. It’s all-hands-on-deck for both sides and their legal, HR, marketing/sales, and accounting departments, as well as key team leaders and management.
If you’ve never taken this road before, there’s a number of steps and obstacles that need to be considered. This merger and acquisition checklist will act as your roadmap to navigating the complex process and steps yet to come.
1. Do Your Homework
Every merger and acquisition is unique and there’s plenty of unexpected obstacles that can disrupt the process. Both sides should do a little bit of research ahead of time. This homework will form the basis of understanding how the process goes, what to expect and what to avoid, for both parties.
Acquirer: First, you should thoroughly research the company you’re acquiring. You’re going to dig deep in later stages of the checklist, but, for now, focus on what you can see at surface level. Does their voice, mission statement, and culture align with your own organization’s?
Also, If you’re acquiring a company, then you’re going to need to make a valuation of the company that you’re buying. Look at valuations for similar startup companies to get an idea of a fair, initial offer.
Seller: You’re not the first company to be acquired; there’s plenty of others to sell their companies or merge with larger organizations, before yours. Their stories, whether good or bad, provide useful examples of what to expect and how to avoid the mistakes of other startups.
If you want to do some extra-credit homework, consider contacting merger-acquisition managers at other companies that have handled these deals in your industry. They may be able to offer some good advice that can help you successfully complete your own acquisition-merger.
2. Don’t Lose Focus
Acquisitions and mergers require a lot of time and effort. While larger companies feel it less, because they have more staff and resources to dispense and allocate, without feeling the stress, it’s important for both organizations to focus on growth above all else.
Acquirer: It’s easy to experience tunnel vision during an acquisition or merger. You have your eyes set on a specific company that you want to add to your enterprise. Unfortunately, there isn’t a guarantee that you’re going to walk away from the startup marketplace with your first choice.
Even if the deal appears to be done, there’s still time for it to sour. Your desired startup may have other partners, or interested parties, that will make their own offer in the later stages of the negotiations. To ensure that you aren’t blindsided by an unexpected declination, you should spend some of your attention on the next-best option, if there is one.
Seller: Having an acquisition or merger deal fall through in the end is not uncommon. Given how much time, effort and focus is required to effectively reach a deal, it can be difficult for startups to manage both the negotiations and the day-to-day operations of their business.
Some of the worst horror stories for startups involved in an acquisition or merger end with companies that focused too much on the deal at hand that they neglected their own growth. When the deal fell through, it was difficult to kick-start their business again and get back to growing.
Even if you’re moments from selling or reaching the end of the deal, always keep growing your business. It will only help your valuation and, if a final agreement can’t be made, you’ll get right back on track.
3. Is there a culture fit?
Culture fit is one of the most important aspects of successful merger-acquisitions. Even if a deal is met, a bad culture fit will create friction in the post-acquisition process. If teams and cultures are too far off, the deal may not be worth it for either side.
Both: As you investigate the other party, spend some time exploring things like their mission statement, company initiatives, tone/voice in messaging and other items that share clues into the company culture. Don’t forget to ask direct questions about the working environment, employee attitudes, and more.
Acquirer: As the buyer, you’ll have a little more insight into the company culture of the other side. As you perform your due diligence into their records, don’t neglect to look at employee benefits, HR policies, and other related documents. These will help support your understanding of the acquisition’s company culture.
Again, if cultures are too far removed from one another, it may present a tough transition for both sides.
4. Make/Receive An Initial Offer/Valuation
The first major move in an acquisition is the initial offer and earliest valuation of the company. For a startup that is looking to get out of the seemingly-endless fundraising cycle, this can be immensely exciting. Unfortunately, this offer is rarely the right, final offering that seals the deal.
Seller: The first thing to consider is the differences between legitimate and non-legitimate offers. Some companies become misguided by proposals and pricings from “buyers” that have no real expectations of making a purchase. A legitimate offer will have an expiration date, come directly from an acquisition manager (or higher) and be followed quickly with a term sheet.
Next, the first offer or valuation you receive will likely be lower than expected, or at least lower than what your startup is actually worth. This is because most acquisitions are strategic, which means the buyer is interested in a piece of your company. It may be the tactical location of your teams, your share in the market, technologies your business has developed, or otherwise.
Finally, when you do receive a legitimate, qualified offer, it’s wise to notify your partners, investors, and even competitors. These are parties with a direct interest in your company. They may quickly come to the table with an alternative deal.
Acquirers: Your first offer needs to be strategic; it should deliver a clear understanding of where your interests are and what you hope to get from the acquisition. If your offer is too low, however, the other party may not be interested in entering any sort of negotiations.
When you make that first offer, it should have an expiration date. This puts pressure on the company to respond quickly. You don’t want to create the opportunity for your offer to simply sit there in no man’s land.
5: Hire the right outside help
Acquisitions and mergers require a lot of work and preparation. Both parties are going to feel some pressure from this strain. Hiring some outside, dedicated, and expert help is a smart move. Not only will it alleviate some of this pressure, but it will also improve your chances of a successful merger and acquisition.
Seller: Hiring some outside professionals is going to be a necessary item on a smaller company’s M&A checklist, especially if you want to be able to manage both the negotiations and your company’s day-to-day.
Some professionals to consider hiring include:
- Legal services: the acquiring company has a deeper legal bench than your company, so hiring some additional legal professionals can help even the playing field.
- Accounting services: your financial records are a primary area of concern for the buyer, which means they have to be impeccable.
- CPA: offering the buyer some outside validation that your financial/accounting documents are accurate can really put them at ease.
- Valuation firm: another layer of outside validation is having your company valued by a third party, specialty firm.
- M&A Broker: while the above professionals are good at niche jobs, a merger-acquisition broker is a great addition to your squad because they oversee and handle a number of different tasks related to your deal, including the analysis and valuation of your business, assessing your objectives for the deal, pre-qualifying any incoming offers, coordinating the closing process and more.
- M&A Advisor: there’s two distinct differences between M&A advisors and brokers; the first is that they work with both buyers and sellers, particularly for larger acquisition deals because their compensation is greater, and, secondly, they focus more on due diligence and the various departments involved in that process, which will be discussed in a later section.
Acquirer: Large enterprise companies will likely have all of the available professionals on hand to navigate a merger-acquisition. That said, you may want to dedicate a team to specifically handle all of the moving parts of the process. Appointing, or hiring, a merger-acquisition manager to head this team is also a strategically smart move.
6. Navigate Negotiations
An initial offer has been made and now there’s a lengthy road of negotiations ahead. Each side is vying to get the better end of the deal. In the end, compromises will be made to (hopefully) reach a final agreement.
Seller: In a perfect scenario, you’ll have more than one offer, which you can use as bargaining chips to improve your final sale price. Each time you receive a term sheet from a potential buyer, you want to take extra care before you sign since your ability to negotiate declines sharply once you’ve agreed to terms.
Since the buyer is going to be doing their diligence to ensure your company is as it appears, you should do the same. Are there any warning signs that detract from the expected success of the acquiring company? During negotiations, you may be able to use these insights to your advantage.
Acquirer: There are different rounds of negotiations when it comes to acquisitions and mergers. Your goal is to minimize the number of rounds, while still ensuring that the final purchase price isn’t beyond what you’re comfortable paying.
As you perform your due diligence, you’ll find ways to push the deal in your favor. But, pushing too hard to get the absolute best deal may make life after the acquisition rocky. You don’t want your newest company to feel that you’ve picked their pockets or devalued their worth.
Both: Negotiation fatigue is a real concern in acquisitions and mergers. Both sides need to be aware of this before they agree to a deal that they don’t really want to make. To avoid negotiation fatigue, agree to short, but comfortable periods of negotiations and closing.
As negotiations become more serious, the buyer will do their due diligence to ensure that their soon-to-be acquisition checks out. This is an important stop on the merger-acquisition checklist for both sides.
Acquirer: You wouldn’t buy a car before a test drive, right? The same goes for acquiring a company. You want to guarantee that there are no hidden surprises or “malfunctions” brewing beneath the surface.
The diligence process involves digging through the records of your potential acquisition and heavily scrutinizing each department, including:
- Accounting: Do the annual reports for the last few years reflect growth and positive performance?
- Finances: Are profits on an incline or decline? What are the financial forecasts for the next few years?
- Legal: Are there any current claims, complaints or other litigations going on? What about other regulatory, legal obstacles?
Intellectual properties: Have all patents, trademarks and other intellectual properties been properly protected?
- HR: What is the organization’s structure? How are employees compensated and are there any benefits?
Sales and customers: Who are the top customers and how what percentage of the total sales do they make up? Will these customers stay loyal after the acquisition?
These are just a choice selection of the hundreds of questions you’ll be asking during the diligence process.
Seller: The diligence stage is nerve-racking for companies looking to be acquired. Deals can really be made or broken at this point. If there are any discrepancies or unexpected problems hidden in your records, it could hurt the valuation of your company. It may even cause the other party to walk away altogether.
The buyer is going to dig deep into your records, with the sole purpose of finding mistakes that lower the end price. A virtual data room is a very important tool at this juncture. With all of these different people accessing your data, you can ensure that your sensitive company information is secure, while still providing all of the documentation that the acquirer needs. Plus, you can see what documents are being access, when and by whom. This activity log may give you winning insight into the negotiations!
Each department needs to thoroughly scrub their records clean and make sure that there are no hidden errors that could cause problems during this step.
Building a Successful Future
Following this checklist will better guarantee that an acquisition-merger deal is not only successful and more painless, but it will also ensure that both parties enjoy life after the merger or acquisition. Remember, it isn’t just about making a deal, but growing a future together as a strong, cohesive enterprise.
Contact SmartRoom today to learn more about how we can help with your merger and acquisition!
SmartRoom, the leading global virtual data room provider and the pioneering search and discovery platform Nalytics, announce a strategic partnership that will integrate the two technologies.
The integration will allow SmartRoom users to utilize Nalytics to undertake challenging information search and discovery tasks with speed, precision and ease, as well as use Nalytics’ Artificial Intelligence (AI) technology to automate file review and analysis – significantly reducing the time involved in the due diligence process.
“We’re excited about this partnership with Nalytics and the value it brings to our customers,” said Jeff Kalina, Executive Vice President of SmartRoom. “The integration eliminates tedious manual work typically involved during due diligence and automates tasks which helps reduce costly risk of human error. As a result, customers will save significant time and money on due diligence. Deal-making will be streamlined and accelerated.”
Margaret Warrington, Product Manager at Nalytics said-
“We are delighted to have the opportunity to partner with SmartRoom. Nalytics will offer an extension to the existing capabilities of SmartRoom by enabling users to perform in-depth searching and discovery within their SmartRoom data. The partnership makes total sense as the two platforms complement each other so well.”
SmartRoom’s next-generation virtual data room delivers greater efficiency and bank-grade security for file sharing and collaboration during strategic transactions. SmartRoom has hosted due diligence for over 10,000 transactions totaling $1 trillion in value for Fortune 500 companies and the World’s leading financial Institutions. With renowned service, upload speeds at 5MB’s per second, and the most advanced multi-layered security of any other platform on the market, SmartRoom delivers a virtual data room experience that is second to none.
SmartRoom and Nalytics will be showcasing their new joint solution at the LegalEx Conference in London on 27th/28th March.