Why is the success of an initial public offering often judged by the investment bankers as nothing more than share price, and to a lesser extent, market capitalization of the company when it goes public?  Because, for the most part, the IPO is viewed as a one-time financial transaction.

However, the key to IPO success is to keep an eye on the longer term through careful planning and preparation. Far from the Wall Street perspective, the IPO should be viewed not as a one-time transaction but rather as a longer-term transformation process requiring two or more year’s lead-time preceding the IPO and careful navigation in the critical three years following it.

What do successful companies have in common? A company that is highly successful launching its IPO generally views the event as a transformative process, while one who is unsuccessful treats it as only an event … a purely short-term financial transaction. A successful IPO process depends on a mix of well-articulated objectives, and carefully deployed financial and corporate strategies that span both pre- and post-offering periods. While there is no magic formula for success, companies that benefit most from an IPO seem to employ three characteristics: preparation, sufficient lead time prior to the offering and strong competitive positioning.  In most cases, the management personnel of an IPO have not been through the process before and are unsure of what to expect.  Most often, they enter the IPO cycle ill prepared and have not done enough pre-IPO planning.

Preparation centers on several key issues. First, employee incentive plans are instrumental to a successful offering. Such plans, if structured to incentivize employees through performance-based measurements, end up having a greater impact on a company's subsequent performance than any other measure. Of course marketing and sales penetration rank high in terms of impact on long-term performance. In addition, successful firms focus efforts to improve strategic planning, internal controls, financial accounting and reporting, executive compensation, employee incentives and investor relations policies.

Even more important than change initiatives is the amount of time devoted to implementation. The earlier structural and improvement initiatives are put in place, the more likely the success of the IPO. Executives who launch such programs a year or more before the offering are more likely to achieve success compared to those who delay. Because management and employees are seen by the public as the most important asset they invest in, companies that institute employee incentive programs at least 12 months before an offering are better prepared and are looked upon from the public as having greater odds at success after the IPO. The evidence is clear if you view the successful offerings over the last decade: identifying, designing and implementing key financial and operational processes well in advance of the IPO are prerequisites to success.

Of course, any company that decides to go public should be a strong competitor in its industry. In fact, highly successful companies uniformly hold formidable competitive positions at the time of their IPO. Superior performance along all non-financial criteria is strongly associated with long-term financial and non-financial performance. While a typical prerequisite to any IPO is that a firm be equal to or better than its peers is not enough to assure success. The would-be IPO must be at the head of the class or success is short lived.

With the proper groundwork in place, you can successfully implement the process of becoming a public company. Preparing your business to perform as a public company well in advance of the IPO is the key. The more thoroughly management plans the transformation process, the greater the likelihood of long-term success.

However, always keep in mind that being public also carries disadvantages.  Wall Street has no mercy … management is constantly scrutinized and the companies share price is a volatile “grade” assessment given by subjective analysts and shareholders.

Before making your final resolution to embark towards an initial public offering, know what sacrifices may have to be made and assess how much time is needed for it to be considered a success, not just by the Wall Street perspective, but yours.

Jim Files launched his M&A career after leading the last company he founded to an IPO in 1994. Jim’s knowledge consists of extensive experience in financing placements that include: raising venture capital, institutional financing and securing funding in the public marketplace. Jim contributes to the knowledge of business owners by sharing the lessons he’s learned during his 30 years of founding, merging, acquiring and selling successful companies. Jim is a mid-market intermediary and works out of VERCOR’S West Coast office.