What you need to know about QuickBooks and IPOs

Often, there comes a time in the evolution of growing companies when leaders consider taking the company public. It’s a big step and has both benefits and drawbacks. And it’s nearly impossible to do if you’re using QuickBooks, but more on that later. First, let’s look at the pros and cons of an initial public offering and what you’ll need should you decide to go public.

I’ll start with the positives. An IPO is a great way to get capital a.k.a. cash. Every share sold in an IPO is cash in the company treasury and can help accelerate growth. The year 2022 saw fewer IPOs than 2021, which set a record at 1,035 on U.S. equity markets. What happens now is anyone’s guess. The medium size for IPOs is around $120 million for mid-sized companies. That’s a lot of capital to invest into the company.

In addition to capital, IPOs offer liquidity to the founders of the business, its employees and private-equity investors. Typically, those groups can’t sell their shares on the open market until six months after the IPO, but it’s still extremely attractive liquidity.

Shares traded on public equity markets can also help with employee recruitment and retention. Companies can offer employees equity in the form of restricted stock grants and stock options, which can be a great incentive to land new talent and retain top performers. Some employee-owned companies utilize employee-stock ownership programs to achieve the same results, but there are individuals who view public companies as better career alternatives than privately owned or employee-owned concerns.

Perspective employees might not be the only audience impressed by a public company as compared with one that’s privately owned. Customers and suppliers might be more tempted to become its supply-and-demand trading partners. Indeed, public companies might receive better credit terms than those privately owned. And since the company is public, its reputation may improve as positive earnings reports are shared in financial media.

Lastly, public companies can fuel inorganic growth without burning through cash in the acquisition process. All-stock transactions, or a combination of stock and cash, may make it easier for companies to seek accretive acquisition targets.

Along with the benefits of going public come some disadvantages, most notably the requirements to publicly disclose the company’s financial health and report on its operations. Depending on the size of the company, some details can be obscured a bit; for example, lumping the results of business units into the company’s overall performance without additional granular detail, but that only gives some cover to small divisions in larger, multiple-entity corporations.

If the company meets or exceeds market expectations, it will be rewarded by shareholders who chose to hang on to the stock or add to their holdings. If the company posts poorer-than-expected results, some investors will dump out. And if the company greatly exceeds market expectations, it might get some pummeling for not being transparent – it’s best to manage expectations closely, whether up or down.

Reporting requirements are a heavy burden and put the CEO and CFO in the public eye front and center. Scheduled reports include annual reports (form 10-K) and quarterly reports (form 10-Q). Companies are also required to immediately file a Form 4 if there’s any change in ownership. This includes stock option grants and exercises for any company officer or shareholder owning more than 10% of the company. Institutional investors and analysts expect earnings calls on the release of 10-Qs and the 10-K. There’s a lot of cost incurred to meet reporting requirements.

Public companies face a lot of pressure to hit their quarterly numbers, from both inside and outside the company. As noted, investors expect it. Since the company management often receives a good amount of its compensation as equity, there’s a big incentive to drive the stock price up with consistent results. This creates a short-term, quarter-over-quarter focus, which in part is why you’ll see more inorganic growth as companies look for short-term fixes to increase earnings.

Speaking of short term, many companies must endure short sellers. Believing that a company’s shares are overpriced, short sellers agree to contracts to sell shares they don’t yet own. For example, they commit to selling shares at $15 per share, and when the contract is due, they hope to then buy the shares at a lower price, say $11, and then sell them for $15 as agreed, pocketing the difference. Since short sellers want to see share prices go down, they browbeat the company in discussion forums such as Reddit and Yahoo Finance. Since they’re anonymous, they sling a lot of fear, uncertainty and doubt, all to drive down share price. Unchecked, short sellers create chaos. Management and the investor relations team will need to spend time undoing their subversions.

Short sellers aren’t the only worry. When a company starts its IPO process, it must disclose a lot of information besides its finances. It must expose insights about its strategies, markets, customers, operations and its competitors. Those competitors will pour over that data and look for opportunities and weaknesses they can exploit.

There are certainly many more pluses and minuses to going public, but should you decide it’s the right path for your company, there are some upfront requirements.

In the U.S., you can list your stock on the NASDAQ or the New York Stock Exchange (NYSE). If choosing the NASDAQ, there are a couple of options; the Global Select Market requires a minimum aggregate pretax income of $11 million in the prior three fiscal years and $2.2 million or more in the past two fiscal years, while its Capital Market requires $750,000 pretax income in the latest fiscal year or in two of the past three fiscal years. The earnings test for the NYSE is $10 million aggregate for the last three fiscal years and more than $2 million for the two most recent years. Both exchanges have a host of other requirements, but earnings tests are a good starting point.

Here’s where using QuickBooks as your accountant system of choice becomes problematic. You will need to provide the exchanges audited financial statements, including balance sheets, statements of comprehensive income, cash flow statements and equity statements for the current and prior years. These statements must be accompanied by an audit report issued by accountants registered with the Public Company Accounting Oversight Board. That’s the rub – auditors don’t like QuickBooks and with good reasons.

Using QuickBooks Online? Want to clear an audit trail? No problem! Click “File,” “Utilities” and “Condense Data.” Then, select “What Transaction Do You Want to Remove.”  A few more steps and poof, it’s gone! No one will ever know. Better yet, no one will ever know when or why the changes were made, or by whom. And that’s THE problem. Auditors want to see robust internal controls, which QuickBooks lack.

Too often, QuickBooks users end up exporting data into spreadsheets, and these are even worse for auditing purposes. Your filtering in QuickBooks reporting is limited to the chart of accounts and class, so you’re exporting a lot of data to spreadsheets so you can analyze the information. These spreadsheets are error-prone, especially when doing consolidations and eliminations. And you have no visibility into the company’s future cash position.

Any time you’re exporting your financial information from QuickBooks, it’s static and out of date. If you’re using third-party systems to build reports, it also increases the chance that multiple people create individual instances of similar reports. Not only are people spending duplicate time tweaking the same reports, but someone may accidentally use an out-of-date report. Time spent on version control is time away from financial management.

Further, the more hands that exchange and tweak the information, the higher the likelihood that formulas will break, or information will become distorted. You could be basing important business decisions on stale or incorrect data.

Lastly, multiple-entity multibook general ledgers are impossible to create in QuickBooks. These should give books for cash, accrual, or both and automatically post to the correct book enabling accrual-based firms to see the impact of cash transactions more clearly. As well, you should have the ability to create books for reporting by different standards, including International Financial Reporting Standards and generally accepted accounting principles. Side-by-side multibook reporting will show comparative performance by different bases.

Regardless of how you get the information you need from QuickBooks to run the business today, it’s insufficient to consider an IPO. There are readiness stages that the finance team must go through, with strong financial controls in place.

The filing process for an IPO, as regulated by the US Securities and Exchange Commission, requires accuracy and efficiency when it comes to financial data. An IPO will change your company from one that’s privately held company into a publicly traded firm, and QuickBooks can’t get you there or keep you there. The auditors must prepare your IPO documents and comply with state and federal regulations, and they will not take a chance on a company with questionable auditability.

If you’re considering an IPO, you need to replace QuickBooks well in advance of proceeding. You’ll need a financial management platform that meets statutory compliance requirements and your own management reporting needs. A configurable system that meets your unique requirements now and as you add revenue, acquire new businesses and expand your reach. A system that’s easily scalable so you can add multiple entities and locations with ease. And one that gives you real-time insights to make strategic data-driven decisions.

If you’re still on QuickBooks, it’s going to take you two years from the time you replace it to look at an IPO. If you think an IPO is in your future, now is the time to make a change.