Drafting the S-1: Avoiding Common Pitfalls in the ... - FTI Consulting

It is vital that
the company
resist any
external
pressure
to stretch
projections
If an IPO is on the horizon, great care should be taken to structure executive compensation
packages appropriately. Every aspect from salary and bonuses to benefit plans and other perks must
be disclosed. Planning ahead can ensure that potentially embarrassing surprises are avoided as the
big day approaches.
PROJECTIONS AND VALUATION
When developing financial projections in advance of the IPO, a company must ensure that the
numbers support the underlying business story and provide a reasonable basis for its growth, as
the valuation will be tied to these projections. However, it is vital that the company resist any
external pressure to stretch these projections.
The projections will be referenced throughout the marketing and road show process, and
analysts will use these statements as a starting point when initiating coverage of a company.
A lack of transparency and consistency in the forecast can lead to confusion in the market, as
evidenced by Facebook’s actions in the days prior to its IPO. By revising the outlook so late in
the process, Facebook caused analysts to reduce their revenue forecast for the company. This
adversely impacted Facebook’s momentum leading up to its IPO, and also resulted in shareholder
lawsuits.
Early agreement in the projections and their underlying assumptions among management,
equity owners and underwriters will ensure a consistent message when releasing numbers to the
public. A strategic communications firm, working with the investor relations director, also can
manage the communication of consistent forecasts and storylines.
CONCLUSION
The amount of time and effort that goes into S-1 drafting and SEC communications can vary
widely by company. If a prospective filer already has a clearly defined strategic plan and
SEC-compliant accounting policies and reporting, completing the process should be relatively
straightforward and not require an extraordinary amount of effort and resources. But for
companies with little of this in place, it is important to begin the planning process as soon as an
IPO decision is made. Several internal departments will need to coordinate with each other and
with external advisors. A project management office often can help effectively manage the work
and prioritize the various steps.
Two of the most significant aspects of going public are presenting a compelling story to investors
and ensuring SEC compliance, culminating in a successful S-1 filing. By avoiding some common
pitfalls presented herein, a company can efficiently manage this aspect of the IPO preparation
process and be better prepared to execute an initial public offering when the moment is
opportune.
DRAFTING THE S-1 5