Main Causes of IPO & SPAC Failures & Tips to Avoid

IPO or SPAC endeavors are often wrought with complexity, bringing many challenges to business leaders looking to grow by going public. In fact, these processes are so complex, costly, and challenging that only 20% of IPOs are actually successful.

As experts in helping business leaders successfully navigate the process of going public, we’ve outlined everything you need to know about IPO and SPAC failures – and what you can do to avoid this happening to you.

Things to know about IPOs or SPACs:

1. IPO vs. SPAC: What’s the difference?
2. What makes a successful IPO or SPAC?
3. What happens when an IPO or SPAC fails?
4. Top causes of IPO and SPAC failures
5. How to successfully prepare for an IPO or SPAC

IPO vs. SPAC: What’s the difference?

Whereas an initial public offering (IPO) is the process of selling shares of a company to the general public, a special-purpose acquisition company (SPAC) endeavor is a process where a private company becomes public by merging with a company that has already gone through an IPO.

Both IPO and SPAC endeavors are often very costly, challenging, and time-consuming, as they require a company-wide focus on due diligence, process enhancement, adherence to regulatory requirements and more.

What makes a successful IPO or SPAC?

A successful IPO or SPAC requires a strong understanding of business fundamentals, solid and effective business processes for finance and accounting activities (e.g. documentation and reporting), a robust internal control environment (e.g. Sarbanes Oxley (SOX compliance), adherence to regulations (e.g. SEC compliance), ensuring audit readiness (PCAOB audit) and more.

It is also vital that a company appears attractive to investors, aligns with stakeholder expectations and enters the market at the correct time.

What happens when an IPO or SPAC fails?

A failed IPO or SPAC signals the need for company leaders to slow down and rework their business models, goals, and processes before they’re able to appear attractive to investors.

In addition, even if a company successfully goes public, there is still the chance for issues to arise if they did not correctly conduct valuation activities (meaning they failed to adequately price their stocks).

The worst possible case scenario for a failed IPO is a company needing to close down or file for bankruptcy, likely due to improper allocation of resources or poor business fundamentals.

Top causes of an IPO or SPAC failure:

1. Lack of planning
2. Putting the wrong processes in place
3. Failing to conduct a gap analysis
4. Putting the wrong technology systems and solutions in place
5. Having underlying issues with business fundamentals or governance
6. Failing to hire finance and accounting consultants or teams
7. Choosing the wrong IPO or SPAC project manager (or failing to hire one at all)

Lack of planning

The number one reason IPOs or SPACs fail is due to a lack of planning.

There’s a lot that needs to go into a successful IPO or SPAC: gathering timely and accurate finance and accounting data, implementing effective systems, bringing the right people onto your IPO team, ensuring compliance with laws and regulations, integrating processes that reduce the potential for risk, and ensuring all of this is properly communicated to investors and stakeholders, to name a few.

Without proper planning and access to the right expertise, you won’t be able to allocate resources to where they’re most needed, leading to a slower IPO or SPAC process and wasting funds on measures that simply won’t lead to success.

Putting the wrong processes in place

Any IPO or SPAC endeavor requires specialized knowledge of financial operations, systems, and internal controls – so without putting the right processes in place and ensuring your team is properly prepared, costly road bumps can arise from any number of places.

Common IPO and SPAC activities include:

• Technical Accounting and SEC Reporting: Implementing GAAP accounting standards and practices, including revenue recognition, leases, credit losses, complex debt and equity arrangement, purchase price accounting and more.
• SOX Preparation: Implementing, performing and maintaining internal controls throughout the business in areas that affect financial statements and reporting.
• Finance Transformation: Assessing the current finance function for effectiveness; leveraging people, processes, and technology to rework financial strategies and procure actionable insights.
• Audit Readiness and Support: Preparing financial reconciliations, roll forwards and other supporting documentation to ensure a smooth auditing process.
• Financial Planning and Analysis: Budgeting, forecasting and conducting analytical work to support major business decisions and overall financial health.

In order to avoid an IPO or SPAC failure, it’s vital to turn to experts to help you identify which activities are relevant to your business and integrate processes that allow you to achieve all of this and more.

Without doing so, you simply won’t be able to become attractive to investors, as they’re looking for companies that function like a well-oiled machine in having solid fundamentals, effective processes, and clear goals.

Failing to conduct a gap analysis

Gap analysis allows you to identify whether or not there are gaps (re: vulnerabilities) within your internal control environment. Common gaps include a lack of internal controls, an internal control that has been established but does not successfully mitigate risk or an internal control that does not operate as effectively as it should.

Without conducting gap analysis – and doing so very early on in your IPO or SPAC process so you can ensure a robust internal control environment – you simply won’t have a solid understanding of the areas of your business that are exposed to risk. And if you don’t understand where and how you may be exposed to risk, you won’t be able to mitigate any of the harmful effects.

As investors want to do business with entities that are as risk-free as possible, failing to conduct this vital step can lead to many costly setbacks for your IPO or SPAC process.

Putting the wrong technology systems and solutions in place

Having the right technology systems and solutions in place is essential for gaining real-time insights into financial and company ongoings, safeguarding your business from risk, and ensuring seamless communication with investors and stakeholders, to name a few of the many ways these tools can be utilized to drive success.

Understanding which systems and solutions will work best for your unique company needs is no easy feat – and integrating them with as little interruption to business operations as possible is equally as challenging, especially if you’re in the midst of an IPO or SPAC activity.

Having underlying issues with business fundamentals or governance

Without understanding the fundamentals of your business and having solid, company wide governance, scaling and growing your company becomes harder to achieve – regardless of an IPO or SPAC endeavor. This means having clear and accurate information regarding profitability, assets, revenue and more and developing a system of rules and practices that outline operations and how they align with stakeholder expectations.

However, as IPO and SPAC endeavors often require an influx of funds from external investors, it is vital to have a solid grasp on business fundamentals and governance in order to drive growth and ensure all your efforts lead to success.

Failing to hire finance and accounting consultants or teams

As the IPO or SPAC process often includes the need to procure years’ worth of finance and accounting data, failing to hire the right finance and accounting consultants or teams is yet another costly setback.

For example, as part of the IPO or SPAC process, you may want to focus on streamlining your sales process, establishing a more structured financial statement close calendar, or developing GAAP financial reports. Hiring a finance and accounting consultant or team ensures you put your best foot forward from the get-go and gather essential finance and accounting data well ahead of time.

Choosing the wrong IPO or SPAC project manager (or failing to hire one at all)

There’s simply too much that needs to go into the IPO or SPAC process. Issues can arise from any number of places, and you likely won’t have the necessary internal resources to tackle this all on your own.

Choosing the wrong IPO or SPAC project manager can lead to timeline delays, a misunderstanding of business fundamentals, wasted funds, a damaged reputation, a lack of company-wide alignment that affects employee productivity and so many more costly setbacks, such as improper communication with investors and stakeholders.

It’s vital that you turn to a trusted IPO or SPAC project manager that has unparalleled expertise in helping businesses navigate all the challenges that come alongside transitioning to a public company.

How to Successfully Prepare for an IPO or SPAC

If you’re considering an IPO or SPAC activity, it’s best to start preparing up to 18 to 24 months in advance.

As there are many efforts you need to make to ensure you successfully go public, the best way to prepare for an IPO or SPAC is to turn to a trusted partner who works closely with business leaders to understand your needs and goals and makes recommendations on how to progress.

---

Insights By

Jeanne Metz

Director, Risk & Compliance

Jeanne is an accounting professional with over 25 years of experience leading teams to achieve value-added solutions. She has managed

Recent Insights