CFO Musings -- Comparing and Contrasting an IPO with the Turnaround of a Listed Company

In both situations, the management team and the board have to be fully aligned on what creates the most value for the enterprise; should the listed company continue to be listed or taken private? Ensuring that an effective governance mechanism is in place or cultivating one is sine qua non. Similar for the company contemplating an IPO, has the company reached the inflection point for a sustained growth rate, meaningful scale, and has the wherewithal to meet the rigorous management required after the IPO? Should a trade sale be contemplated instead? It should all be about value creation!

In order to assess what will create the most value, the CFO has to ensure that there is a realistic and reasonable valuation of the entity, using several quantitative and qualitative methods, including but not limited to top-down and bottoms-up approaches to determine value under various scenarios.

If after such an evaluation, the IPO is the chosen path for the startup or the listed company stands to bounce back strongly for continuing to be listed, then under the CFO, the team has to craft a compelling Value (or Equity) Story to articulate the proposed upside succinctly to investors – that would be the backbone of all shows, whether a roadshow or hosting.

To follow up on the steps necessary to achieve the value to be garnered for going through either process, the CFO has to lead the development of a robust financial infrastructure (a sound IT system with the requisite financial and accounting modules in place) to capture the improvements, to assist in the follow through on the roadmap assessment to value, and to report internally so as to render the necessary feedback in the operations for improved performance or course correction, and as well as to report externally to the SEC (be it the S-1 for the 1933 Act or subsequent Qs and Ks as required under the 1934 Act), relevant regulatory agencies, analysts, media, and the investment community at large.

In both instances, the CFO should have a clear line of sight of cash management; if it needs repeating; value is dependent on cashflow generation! While the CFOs in IPOs need to show what they plan to do with the proceeds from the event, the turnaround CFO of the listed company does not have a similar responsibility. The listed company shareholders will be the ones gaining from the turnaround in the short-term or in the long-run when the entity is involved in an M&A event (although the company does receive other benefits; for example -- lower debt costs due to increased equity cushion). Value will accrete to the listed company, if the entity were to raise equity in the future (some dilution notwithstanding).

In either case, the CFO has to come up with the optimal capital structure for the entity, taking into account the costs of capital both explicitly and implicitly. While leverage can enhance the returns on equity in either case, it can also wreak havoc, depending on the volatility already embedded in the business. The CFO should practice Prudent Capital Structure Management (PCSM) in all scenarios.

In the turnaround or the IPO scenario, the CFO has to lead the entity in working to increase revenue from the existing business and or from other viable sources, in addition to establishing a clear path to profitability. A substantial effort has to be put on the TAM to make realistic assessments of the revenue generation exercise. This can be done, scanning the landscape to determine how best to maneuver against the competition, if any.

To create or enhance value in both cases, the skills for value creation for the CFO are interchangeable.  What is needed is the ability to form a sound strategy (an all-encompassing one) with the discipline to execute prudently. The CFO, working closely with the CEO and leadership team, can be the catalyst for the value creation effort!

#startups #CFO #IPO