When a private company plans to go public, it may not make much fanfare or advance announcements. This is partly due to the official requirements of the Securities and Exchange Commission for announcements and prospectuses, and partly because a company listing is big news and will put the company under a magnifier. It's easier for companies to prepare in a relatively low-key situation. Still, before the official notification and filing, the company will make some unusual small moves, and smart investors can start here.

Corporate Governance Upgrade

To be listed on a stock exchange, a company needs to first meet certain criteria, such as having an external board of directors; having an effective internal control system for the company's financial management; and establishing a formal process whereby any employee or other person can directly report to the Audit Committee illegal activities within the company and activities contrary to company policy. Intensive announcements of new policies and establishment of a series of new processes could be a sign that a company is about to go public.

"Big-Bath Charges" or Asset Write-Downs

Public companies and those that are about to go public, are required to make annual and quarterly financial statements public and subject to review by investors and analysts. For private companies that have not yet gone public, their financial statements are usually audited by themselves, and charge-offs can be carries out in accordance with GAAP. Therefore, companies generally undertake a “big bath” before going public in order to provide better profit and loss statements in the future.

For example, accounting standards require that companies write down slow-moving or inventory valued below initial cost. But in practice, there's a lot of wiggle room. Often companies keep as much inventory on their balance sheets as possible to ensure that they meet the asset ratios required by banks and other lenders. Once a company is considering going public, they would do an inventory write-off so that it doesn't affect shareholders' profitability in the future.

Sudden Change in Senior Management

Once ready to go public, the company must consider whether the existing management is qualified and whether it needs to bring in some fresh blood. In order to attract investors, companies often need experienced cadres and managers, especially those who have had outstanding performance in leading companies. A sudden leadership overhaul in the company could be an effort for improving its image before going public.

Sale of Non-Core Business Units

Self-made private companies often have subsidiary business units that assist the company in achieving its primary business purpose. For example, an office supply business may also provide payroll processing services, although it is not directly related to its main business. In an IPO, the prospectus needs to clearly state the main business direction of the company. So if a company is selling a non-core business, it could be that the company is slimming down for an IPO.

Summary

Private companies may remain silent about their intentions to go public until they file official documents and make an announcement as required by the Securities and Futures Commission, so it is difficult to tell whether a company is going public. But by looking for the small signs mentioned in this article, we may be able to make the closest guess to the truth.

（Writer：Daimy）