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Exit-stage tech: Going public or passing the torch is your heaviest lift yet

June 2, 2023

Authored by RSM Canada LLP

Joel A. Humphrey, CPA, CA shared this article

ARTICLE | June 02, 2023

The company has grown in complexity, expanded its reach and matured—in a sense, you have reached a graduation point, though that doesn’t mean the evolution of the enterprise is over. Where does the company go from here? What is the best form for the company to take to reach the next level? What is your exit plan and what do you need to figure out to execute that plan?

"Tax and other technical matters are just one part of the picture. When going through an IPO, you need to invest in planning just as much as the execution of the next stage. This is a transformational journey; you want to come out of it feeling like you did it the right way."

Caitlin Hughes, Partner, Technical Accounting Consulting, RSM US LLP

Key considerations for tech company success in the exit stage

The technical aspects of the late-stage evolution of your tech company are significant, but the tax and legal considerations don’t exist in a vacuum. You also have considerable strategic and planning responsibilities to shoulder on the road to paperwork, due diligence, audits and all the rest. Here are some of the top issues on your plate:

Preparation for the next stage

  • Assess the strategic vision for your company. How has it changed over time? What else might need to change going forward?
  • As you come to the market with an exit posture, whether private or public, you need a compelling story for investors.
  • Determining both your vision and your story typically requires not just a good leadership team but also good external advisors.
  • Determine whether a private or public exit is best for the company, based on your vision, your story, your history and your team. The two options are very different, and simply being “open to either” does not constitute a clear or viable plan.
  • Maturity in terms of financial results and maturity in terms of management and infrastructure are two entirely different things—do you have both?
  • Ensure that your teams fully understand the road ahead and what will be required to travel it.
  • If you haven’t already leveled up your CFO, now is the time. At earlier stages, the CFO may juggle finance, accounting and investment duties, but now you need someone who can be the face of the company for both investors and the broader market—someone who can talk the talk and is savvy about negotiating things like debt, lending and equity raises. Ideally, this person will have navigated exits before. 

Considerations for going public

  • If you are planning an IPO, begin your preparations 12 to 24 months before the planned IPO date. Extremely organized companies with very mature infrastructures can go through the S-1 process with the SEC in six to nine months, but that’s rare. Some companies need as long as three years.
  • Make sure you are PCAOB compliant and have adopted all public standards.
  • If you have not maintained proper independence from your auditor, you will need a new auditor and audit before you commence the S-1 process.
  • Do you have the team, infrastructure and especially systems in place to handle the rigors of Sarbanes-Oxley (SOX) compliance? Many tech companies, particularly in the software market, have homegrown systems to handle key accounting decisions, specifically around revenue and order management. These typically are not up to the task of handling internal controls at the level SOX requires.
  • You can't control the market and you can't control what investors are going to do, but you can control your financial health and make sure you approach the IPO process with your financials flushed out—preparation is the key.

Considerations for a private exit

  • A private equity changeover or acquisition by a larger company seeking you as an add-on is not as daunting as pursuing an IPO in terms of the amount of preparation or the number of boxes you need to tick off on a checklist, but it is no small task.
  • While a private exit may not be as intimidating in terms of scale or specificity as an IPO, it does pose many challenges in terms of finding the right fit and meeting the expectations of the acquirer.
  • Consider the ways you may need to streamline your operation and processes to appeal to a buyer.
  • In what ways might you need to upscale the company to fit into a larger business?
  • In a reversal of the IPO situation, private equity is often less focused on rigorous internal controls and audit processes, as they may be seen as a “waste of money” for a non-public company.
  • You want to have a clean bill of health historically so that you can put forth a story that is compelling but achievable—something that demonstrates historical growth with an eye on future expansion.

"Earlier-stage growth focuses on sales and market penetration. By this expanded growth stage, it’s about how to scale the business up operationally and in terms of infrastructure, how to do more things at less cost and how best to allocate resources."

Eliot Mitchell, Director, Business Risk Consulting and ESG Risk and Controls Leader, RSM US LLP

Additional considerations

Just because a company is mature in terms of sales, market presence, reputation, etc., it isn’t necessarily mature from a process, procedure, infrastructure and management perspective. Make sure to evaluate your company at this late stage—even if you aren’t ready to consider an exit strategy—to ensure that the company is ready to handle continued evolution. Some factors to consider include:

  • Think more heavily about environmental, social and governance (ESG) issues, because those priorities can mean a lot in terms of investor interest and your public standing.
  • Although not integral to the exit process, you should be thinking about what processes you can automate—rather than just hiring people incrementally—as you scale to a larger operation that might be approaching Fortune100 size.
  • Enhance your cybersecurity efforts. Private equity and large companies do not want to acquire risk by acquiring you, so security is paramount. If you are considering an IPO, a security breach could become front-page news with your increased visibility and could sour investors on your offering.
  • In part related to cybersecurity, now is the time to hire a CIO, CISO and/or CTO if you haven’t already. Also, on the financial side, you need a strong controller or chief accounting officer equivalent.

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Source: RSM Canada
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