CPA Advice on Preparing to Go Public . . .

From The Ernst & Young LLP Guide To The IPO Value Journey, by Stephen C. Blowers, Peter H. Griffith, and Thomas L. Milan (John Wiley & Sons, Inc. 1999)

Before you proceed into an IPO event, you may need to do some corporate housekeeping. This involves considering whether the existing corporate, capital, and management structures are appropriate for a public company and whether your transactions with owners and management have been properly documented and recorded.

Corporate housekeeping generally begins during the planning stage and may not be completed until the registration statement is filed with the Securities and Exchange Commission (SEC). The following are typical questions to be considered during this phase:

• Should the company’s capital structure be changed? Restructuring may have tax implications, but you can mitigate any tax disadvantages with appropriate planning. You may want to simplify it by issuing common shares in exchange for preferred stock or special classes of common stock.

• Should additional shares of stock be authorized? Additional shares might be needed for the public offering or for future acquisitions or sales.

• Should the stock be split before you go public? To improve the common stock’s marketability, companies frequently split their stock so that the offering price of the stock – after consultation with underwriters - will be between $10 to 20 per share.

• Should affiliated companies be combined? A public company generally is organized as a single corporation, perhaps with subsidiaries. Affiliated companies might provide services to each other, compete with each other, or might sell related products and services. The combined entity may well be more attractive to investors and thus command a higher price in the market.

• Should the company’s articles of incorporation or bylaws be amended? A private company may have special voting provisions that are inappropriate for a public company, or the board of directors may need to establish certain committees, such as audit and compensation committees.

• Are the company’s stock records accurate and current? Accurate shareholder information is a must for a public company. (While reviewing the stock records, be alert for problems with previous issuances of unregistered securities).

• Are the company’s transactions or arrangements with the owners and members of management appropriate for a public company, and are they adequately documented? The SEC requires public companies to fully disclose all significant related-party transactions. Such transactions should be identified and discussed with the company’s legal counsel early in the process.

• Are the company’s contractual obligations appropriate for a public company? Your legal counsel can assist you in challenging the appropriateness of your contractual obligations by performing a "legal audit" of significant contracts (including employment contracts, stock option or purchase plans, debt and lease agreements, shareholder or management loans, rights of first refusal, corporate charter and bylaws, and major supply contracts).

• Have important contracts and employment agreements been put in writing? Do they need to be amended?

• Should a stock option plan be implemented? Should additional options be granted under existing plans?