Initial Public Offering (IPO) Presentation

By Robert Christopher Argosy University

Differences in Accounting
Private Company track historical operational and financial numbers, compile them and roll them into financial statements. many private companies rely on owner contributions, owner-guaranteed business debt and cash flow generated by operations thus accounting tends to focus on finding low interest debt, managing that debt and recording and managing accounts receivable. Public Company must focus on preparing quarterly and annual reports that are subject to significant inspection by large institutional investors, credit rating agencies and the Security and Exchange Commission. executive management must defend the information accountants compile, so significant time is spent collecting, recording and monitoring internal financial systems.

Differences in Accounting
Private Company Public Company

accounting at a private company tends to be more concerned with the company's overall financial and operational position because of the focus on internal management and the smaller size inherent with smaller companies. very few small private companies have audited financial statements

public company accountants work closely with external auditors to prepare audited quarterly and annual financial statements. public company accountants help identify ways to minimize expenses to help drive greater profitability.

Differences in Accounting
Private Company

accountants in private companies generally focus on creating accurate annual tax returns private company accountants often focus on identifying all possible tax deductions in order for their owners or the company to pay the minimum possible tax.

Five Reasons Why a Company should Go Public

Corporations can earn more money than a proprietorship or partnership. (Horngren , Harrison, & Oliver 2008)
Issuing Bonds. A bond is a written promise to pay back a specific amount of money at a certain date or dates in the future. Issuing Preferred Stock. A company may choose to issue new "preferred" stock to raise capital.

Five Reasons Why a Company should Go Public

Selling Common Stock. Usually, investment banks help companies issue common stock, agreeing to buy any new shares issued at a set price if the public refuses to buy the stock at a certain minimum price. Using profits. Corporations also finance their operations by retaining their earnings.

Five Reasons Why a Company should Go Public

A corporation has a continuous life. (Horngren , Harrison, & Oliver 2008)
Continuous life. The life of a corporation, unlike that of a business partnerships and sole proprietorship, does not expire upon the death of its stockholders directors or officers.

Five Reasons Why a Company should Go Public

There is no mutual agency among stockholders. (Horngren , Harrison, & Oliver 2008)
Lack of mutual agency for stockholders. A corporation acts through its agents, who are its officers and managers not through its stockholders.

Five Reasons Why a Company should Go Public

Stockholders have limited liability. (Horngren , Harrison, & Oliver 2008)
Stockholders arent liable for the corporations acts and debts, stocks usually are transferred easily, the life of the corporation is unlimited, and stockholders are not corporate agents.

Five Reasons Why a Company should Go Public

The transfer of corporate ownership is easy. (Horngren , Harrison, & Oliver 2008)
In corporations, the individual owners' rights and privileges are represented by the shares of stock they hold. On the back of each stock certificate there is usually a place indicated for the shareholder to endorse and sign over any shares that are to be sold or otherwise disposed of.

Information the firm is required to provide to the investor with complete transparency.

Transparency is the extent to which investors have ready access to any required financial information about a company such as price levels, market depth and audited financial reports.

Information the firm is required to provide to the investor with complete transparency.
Income Statement. (Horngren , Harrison, & Oliver 2008) It provides a summary of a firms revenues and expenses for a period of time. It displays the following:
Net income (total revenues greater that total expenses) or Net loss (total expense greater that total revenues).

Information the firm is required to provide to the investor with complete transparency.
Statement of Owners Equity. (Horngren, Harrison, & Oliver 2008) It shows the changes in owners equity during a period of time.
The only increase in owners equity comes from net income. Decreases in owners equity comes from two things, withdrawals and net loss.

Information the firm is required to provide to the investor with complete transparency.

Balance Sheet. (Horngren , Harrison, & Oliver 2008)It lists the firms assets liabilities and owners equity as of a specific date.

Information the firm is required to provide to the investor with complete transparency.
Statement of Cash Flows.(Horngren , Harrison, & Oliver 2008) It reports cash receipts and payments. It shows the following:
Where cash came from (receipts) and cash was spent (payments). Reports why cash decreased or increased during a period. Covers a span of time and is dated the same as the income statement.

Thinking about Going Public

Eighty-seven percent of CFOs participating in a recent survey of US firms that have gone public in the past several years indicated that their firms spent more than $1 million on one-time costs associated with the transaction. The survey indicated that CFOs were more likely to be surprised by the costs of going public than the costs of being public. Specifically, 23% of surveyed CFOs reported that the costs of taking their firm public had exceeded their expectations by a significant amount. In contrast, 13% of the participating CFOs indicated that the costs of managing a public firm were significantly more than they had anticipated before the IPO.

(PwC Deals.com, 2012)

Cost of Going Public

Underwriter's discount
Legal External auditor Financial reporting advisor
Typically 5% 7% of gross proceeds

Fees from securities counsel to draft the registration statement and provide other advice directly related to the offering.

Fees incurred by the independent registered public accounting firm directly related to the offering.

Fees incurred by financial reporting advisors directly related to the offering, for example, preparation of financial statements, and help in addressing comments from the SEC.

Printing

Document management, SEC filing, printing and distribution expenses. Registration/other Registration-related fees and expenses (SEC, state, rating agency).

Initial Listing fees and Annual Listing fees

600000

500000
400000 300000 Column1 Column2

200000
100000 0 Initial listing Annual listing fees

Percentage of CFOs One-time cost vs. expectations

60 50 40 30 20 10 Being public Going public

0
Significantly more Slightly more than than expected expected In line with expectations

The Process of Going Public

The Process of Going Public

Underwriter. A liaison between the corporation and capital markets. (referenceforbusiness.com,2013)
Select one Three types of underwriting arrangements: best efforts all or none, and firm commitment Lead underwriter will select a team of underwriters and brokers. Select an underwriting team consisting of attorneys, independent accountants, and a financial printer.

The Process of Going Public

SEC (Securities Exchange Commission) Regulations (referenceforbusiness.com,2013)
Prepare an initial registration statement according to SEC regulations Initial registration statement, it is sent to the SEC for review During this incubation period the company's attorneys correspond with the SEC in order to learn of any necessary changes under go SEC audit by independent accountants.

The Process of Going Public

distribute a prospectus to potential investors business owners and top managers travel around to make personal presentations of the material. files various forms with different states in which the stock will be sold holding a due diligence meeting to review financial statements one last time.

The Process of Going Public

At the end the review the SEC provides comments on the initial registration statement that the company must address ,agree to a final offering price for the shares, and file a final amendment to the registration statement. The actual selling of shares then takes place, beginning on the official offering date and continuing for seven days.

The Process of Going Public

After a successful offering, the underwriter meets with all parties to distribute the funds and settle all expenses. At that time the transfer agent is given authorization to forward the securities to the new owners.

Disadvantages of Public Ownership

Your books will be open to the public and your competition. (myownbusiness.org 2013)
Corporations are required to keep shareholders informed about operations, financial condition and any adverse circumstances. In doing so you will also be sharing your overall corporate mission and finances with your competitors. Your quarterly and annual report to the SEC is going to disclose comprehensive details of your company's operation and performance.

Disadvantages of Public Ownership

Higher accounting costs. (myownbusiness.org 2013)
Accounting costs for at least two years prior to going public and while public will be increased due to the requirements of audited financial statements and compliance with Sarbanes-Oxley Act (SOX). The companies accounting department will need an increase in staff to prepare quarterly and annual financial information provided in formats required by the SEC.

Disadvantages of Public Ownership

Majority of independent directors. (myownbusiness.org 2013)
Corporations must have a majority of its board of directors be people from outside the company. To counter reluctance of potential board members to join public boards compensation is paid to board members

Disadvantages of Public Ownership

Ownership valuation will be subject to market fluctuations. (myownbusiness.org 2013) Ownership valuation is going to fluctuate with the stock market. At times the company will be valued at higher than its intrinsic value and other times where it can be much below its true value.

Disadvantages of Public Ownership

Companies will lose some flexibility in operating their business. (myownbusiness.org 2013)
Conforming to state and federal securities laws, especially on occasions when you are required to get shareholder approval for your actions, will impose constraints not present when operating a privately owned business. In most instances however such restraints will be constructive in helping avoid business mistakes that could result without the restraints in place.

Disadvantages of Public Ownership

Defend against hostile takeover. (referenceforbusiness.com 2013)
If enough shareholders become disgruntled with the company's stock value or future plans, they can stage a takeover and oust management.

Concerns the company should guard against while transitioning from privately held to publicly held
Your books will be open to the public and your competition.
Practice ethics in accounting and separate duties accordingly to discourage fraud

Ownership valuation will be subject to market fluctuations

Study market carefully to make informed decisions

Defend against hostile takeover. (referenceforbusiness.com 2013)

Have built-in defensive measures that make a company difficult to take over. (howstuffworks.com 2013)

References
cfs.purdue.edu(2013) Chapter 13Accounting for Corporations Retrieved from: http://www.cfs.purdue.edu/class/HTM141/Chapter_13.pdf economics.about.com (2013) HowCorporations Raise Capital Retrieved from: http://economics.about.com/od/smallbigbusiness/a/corp_capital.htm entrepreneur.com (2013)Incorporating Your Business Retrieved from: http://www.entrepreneur.com/article/77730#ixzz2O1s8tpu8 Google (2013)Retrieved from: https://www.google.com/search?hl=en&biw=1366&bih=598&noj=1&tbm=isch &sa=1&q=ipo+chart&oq=ipo+&gs_l=img.1.1.0l8j0i10l2.22518.23589.0.25931. 7.7.0.0.0.0.94.532.7.7.0...0.0...1c.1.7.img.7ioevF7jL4#imgrc=WnLDbN3yDWNIjM%3A%3B4gZIV7_MFygDtM%3Bhttp%253 A%252F%252Fwww.aaefo.com%252Fimages%252Fipo_chart.jpg%3Bhttp%253 A%252F%252Fwww.aaefo.com%252Fconsulting_services_1.htm%3B500%3B2 20

References
Horngren, C. T. Harrison Jr., W.T., Oliver, M. S. (2008) Accounting, 8th Edition http://wpscms.pearsoncmg.com/wps/media/objects/6716/6877765/hha08_fl ash_main.html?chapter=null&page=133&anchory=null&pstart=null&pend=nul l Howstuffworks. com(2013) Retreived from: http://money.howstuffworks.com/hostile-takeover3.htm Investopedia.com (2013)Retrieved from: http://www.investopedia.com/terms/t/transparency.asp myownbusiness.org (2013 )Session 13: Public ownership Retrieved from: http://www.myownbusiness.org/public_ownership/ PwC Deals.com(2012) Considering an IPO? The costs of going and being public may surprise you Retrieved from: http://www.pwc.com/en_us/us/transactionservices/publications/assets/pwc-cost-of-ipo.pdf referenceforbusiness.com (2013) Retrieved from: http://www.referenceforbusiness.com/encyclopedia/Dev-Eco/DueDiligence.html#ixzz2O5RY0l00

References
referenceforbusiness.com (2013)Retrieved from: http://www.referenceforbusiness.com/encyclopedia/For-Gol/GoingPublic.html#ixzz2O2pd4x6L residual-rewards.com(2013) Retrieved from: http://www.residualrewards.com/businessformscompared.html Youbusiness.azcentral.com (2013)Retrieved from: http://yourbusiness.azcentral.com/comparison-accounting-experienceprivate-company-public-company-25017.html