Special purpose acquisition companies (SPACs), or so called “blank check companies,” seem to be experiencing a resurgence, and the Securities and Exchange Commission (SEC) may be warming back up to them. SPACs are shell entities that “lift-up” private companies into the capital market realm. They’re 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 required by the Securities Act of 1933.
Going public via a SPAC does have its complications, and realistic expectations need to be set before pursuing the endeavor. Before going public through a SPAC, your target organization needs to be prepared on a number of fronts; otherwise, the pace of the deal can be slowed, causing your organization to lose value (additional fees to attorneys, investment banks, etc.) Here are five things to consider.
1. GAAP accounting for SPACs
To prepare your organization for an audit, you’ll need to comply with U.S. GAAP. The financials will need to be presented in accordance with SEC reporting standards under Regulation S-X in preparation for future filings. (There can be many, and in a short period of time.) This requires a strong underpinning of accounting policies and procedures. If you haven’t yet 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
Creating or enhancing a GAAP-based financial reporting package needs thoughtful planning. A robust and easily repeatable financial reporting mechanism not only helps when the statements are audited, but also when quarterly and annual filings are required.
2. Audit readiness
In order to move forward and gain access to the capital a SPAC offers, you’ll need to be ready for the scrutiny and rigor of an audit as a public company. Many target companies are entrepreneurial by nature and aren’t ready to stand up to this level of auditing. It’s critical to have a public company‑ready leadership team in place to lead the transition and drive the cultural changes required to succeed as a public company. Partnering with an experienced firm to manage the transition and advise leadership is a key step in executing that journey efficiently and effectively. They’ll help develop the financials and setup of the accounting structure in your ERP solution, answer questions concerning the segregation of duties, and prepare a host of schedules. After preparation, you’ll need a minimum of two (sometimes more) fiscal years of audited statements. These will be required as part of the S-4 (if applicable) and Super 8-K filings.
3. Tax compliance
Tax provisions are one of the most difficult and complex matters in the preparation of your financial statements. Ensure a tax team is in place with adequate resources to dig in, understand the complexity, and prepare the proper entries and footnotes to the financial statements. Be ready for pushback and questions from the external auditor. Having an expert on the team (often as an outsourced provider) can help alleviate future headaches.
4. Equipping the accounting and finance organization
A fully developed accounting and finance team is essential to ensuring a successful transition to a SPAC structure. It’s important to establish reporting lines, understand profitability analysis, and establish the data room for your investment bank. This includes:
- Preparation of the pro forma balance sheet, income statement, and cash flow statement.
- Documentation and analysis of how the acquirer and acquiree are defined and determined.
- EBITDA, adjusted to EBITDA analysis.
- Compensation, salary, and headcount.
- Pricing methodology.
- Healthcare and other benefit programs.
- Freight and shipping.
- Customer terms.
When compiling this information, remember that it will eventually need to be “combined” with the SPAC entity, as if the organizations exist as one company. This will include pro forma adjustments related to the transaction — even if it hasn’t closed yet — and definitely after it closes. The related filings both before and after the transaction closes will require this level of detail.
5. Audit-ready internal controls
Depending on market capitalization and revenue, public companies need to be compliant with the Sarbanes‑Oxley Act of 2002 (SOX). This means, as a target company, both your accounting policies and procedures and your internal controls must be documented. The assessment of the design and testing of those controls is part of the SOX 404(a) Management Assessment of internal controls and is used 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.
Preparation is everything
Preparing for acquisition by a SPAC requires extensive effort, and there’s a significant investment in terms of your team’s time and the cost of outside providers. Plan for it upfront and leave adequate time to prepare — delays can impact your access to capital or even failure to get the deal done, creating financial setbacks for your company that can far outweigh these costs. Looking for an expert that can help you with every item on this list? Contact us today.
