Special purpose acquisition companies (SPACs), or so called “blank check companies,” seem to be the darling of Wall Street lately, largely due to their ability to avoid the typical IPO pitfalls. SPACs are essentially shell companies set up by investors that allow private companies to be acquired and taken public without going through the traditional IPO process.
A SPAC is an excellent way for a target organization to unlock value and gain access to a significant amount of capital in an expedited fashion without some of the challenges that organizations face following a traditional S-1 registration process.
But before going public through a SPAC, target organizations need to be prepared on a number of fronts; otherwise it can slow the pace of the deal and cause the organizations to lose value (additional fees to attorneys, investment banks, etc.). Here are five things to consider.
1. Audit readiness
In order to move forward and gain access to the capital a SPAC offers, you’ll need to be ready for an audit by an external audit firm. This means not only being ready to address the matters above, but being ready for the scrutiny and rigor of an audit as a public company. Many target companies are entrepreneurial by nature and are not ready to stand up to this level of auditing. Hiring a firm to manage the process and prepare your team is a key step in getting through the process efficiently and effectively. There’s a great deal of effort on the part of the accounting team to support the financials, the setup of the accounting structure in your ERP solution, questions around the segregation of duties, and a host of schedules you’ll likely be asked to prepare.
2. GAAP accounting for SPACs
To prepare your organization for an audit, you’ll need to comply with U.S. GAAP. This requires a strong underpinning of accounting policies and procedures. However, if you haven’t prepared your accounting in accordance with GAAP, you may need to put in significant work to align your financials with the standard.
When reviewing your accounting, consider these items:
- Revenue recognition
- Financial close practices
- Corporate allocation methodology
- Intercompany transactions
- Share-based payments
- Business combinations
- Unusual or unique transactions
- Items with significant judgment and estimation
- Adoption of new accounting standards
- Unwinding any private-company accounting alternatives
3. Tax compliance
Tax provisions are one of the most difficult and complex matters in the preparation of your financial statements. Without a tax team, having the adequate resources to dig in, understand the complexity, and prepare the proper entries and footnotes to the financial statements. It’s also crucial to consider that you’ll likely get push back and questions from the external auditor. Having an expert on the team (often as an outsourced provider) will alleviate future headaches.
4. Equipping the accounting and finance organization
Many SPAC target companies are spawned from a great entrepreneurial idea. That doesn’t always translate to the development of a fully-fledged accounting and finance team. It’ is important to establish reporting lines, understand profitability analysis, and establish the data room for your investment bank, which includes:
- Preparation of the pro-forma balance sheet, income statement, and cash flow statement
- EBITDA, adjusted to EBITDA analysis
- Compensation, salary, and headcount
- Pricing methodology
- Healthcare and other benefit programs
- Freight and shipping
- Customer terms
5. Audit-ready internal controls
Public companies (depending on market capitalization and revenue) need to be SOX compliant. This means, as a target company, not only having your accounting policies and procedures documented, but clear documentation of your internal controls. The assessment of the design and testing of those controls is part of the SOX 404(a) Management Assessment of internal controls and is leveraged by the external auditor in the 404(b) external auditor opinion of your controls. This should be developed alongside your GAAP readiness measures to gain the greatest level of efficiency.
In conclusion
It may seem like a lot, and the effort behind this can be expensive in terms of time and leveraging outside providers; however, delaying the access to capital or worse, the failure to get a deal done will far outweigh these costs. Looking for an expert that can help you with every item on this list? Give us a call, or download our SPAC Readiness Tracker today.
