When a business decides to go public, its legal counsel and underwriters are required to begin a rigorous investigation of the business intending to offer public shares. This process is known as the due diligence investigation. The goal of the investigation is to fully understand the nature of the business and the risks and problems facing it as well as to assure the investing public that the company’s registration statement is accurate and complete.
If you have decided a public offering is the best financing solution for your company, you should realize that success depends on careful planning and the assistance of a team of qualified professionals. The planning process should begin two to three years before the anticipated date of completing the offering. This lead time is important if you wish to keep IPO costs to a minimum, avoid surprises, adequately prepare the company for the due-diligence process and the public scrutiny associated with an IPO, to and increase the chances of good market timing.
Anticipation of an IPO
The first thing to do in anticipation of an IPO is to develop a business outline detailing your future strategic marketing and financing plans. The due diligence process allows the underwriters to develop a marketing strategy to help ensure the successful sale of the security offered in the IPO. You should review a due diligence checklist, such as the one summarized below, to help identify areas needing special attention before you contact potential underwriters. Here are a few general ideas of the documents and information you will have to produce to cooperate with the legal counsel and underwriters in a due diligence investigation:
- Business Structure – Be prepared for reviews of your business plan, employee counts by function and area, company minutes for the last five fiscal years, organizational charts by legal entity department and divisions, and details of the cities and states where you have operations. You will also need to provide copies of your articles of incorporation bylaws and amendments.
- Market Research – You will need to offer copies of the following for the past three years: all brochures, news articles and press releases issued to company shareholders or the press; research reports or market studies; and advertisements and sales literature. You will also need to provide discussion of competition with detailed factual information, industry studies discussing market size for your products or services, and your strategic marketing plan.
- Management Team – Of the documents requested, the most important include a resume for each director and officer, discussion of employee relations (including details on union strikes or contracts), details of contemplated changes in executives or their responsibilities, description of recent transaction between the company and insiders, an overview of key employment contracts.
- Regulatory and Legal – This area includes a review of your patents, outstanding/threatened litigations, investigations or regulatory audits, details of internal quality control and regulatory compliance review efforts, summary of insurance coverage and bonding relationships, and details of any material quality control and regulatory compliance problems over the past five years.
- Financial Information – There are a variety of documents required for financial reporting. Some of the primary documents include copies of financial statements for the last five fiscal years, quarterly breakdown of financial performance for the last two fiscal years, analysis of components of direct costs, summary of current historical backlog trends, analysis of accounts receivables and receivables aging, and names of major suppliers and amounts purchased from each in the last five years.
The due diligence process has many layers and components beyond those listed above. Be prepared for an in-depth probe of your company its operations and marketing activities, management personnel and any other financial information and major contracts and agreements that may be requested.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.