Considering a SPAC? This 3-Step Stress Test Can Tell If You’re Ready

If you’ve ever been near an airplane’s flight deck, you may have overheard a conversation that went something like this:“Avionics Switch—off.” “Master Switch—on.” “Flaps—down,” etc. What you’re hearing is the flight crew systematically going through a preflight checklist making sure everything’s in order. It may sound rote and mundane, but that attention to detail can spell the difference between a smooth flight—or not making it to your destination.

The same can be said for some special purpose acquisition companies (SPACs) nowadays. All too often, some skip the full “preflight” checklist and never end up at their destination: a successful listing followed by a well-run publicly traded company.

Consider some recent numbers. Of the 200-plus companies restating past financial statements so far this year, more than 170 of them were SPACs. Listings are also down as investors start worrying about the risks of companies that may not actually be ready for primetime. Listings fell from 118 in March to just over a dozen a month later. May disappointed as well with fewer than 20. Plus, SPACs have also attracted the attention of federal legislators with talk of regulation on the horizon.

The news is not all doom-and-gloom, however. Based on our experience helping numerous companies go public, we believe—long-term—SPACs will continue to be a great path for private companies to gain the advantages of going public.

But the time has come for less euphoria and a lot more sobriety when it comes to taking this important step. Careful planning and this three-step stress test can help better determine if your company is truly SPAC-ready and give you a better idea of what’s needed for success. Consider it your pre-flight SPAC checklist.

1. The 3-P’s: People, Processes and Planning

Do you have the accounting skill sets in place to meet the tougher demands of a public company moving forward? It’s not just the listing that’s at stake—it’s also life afterwards as a publicly traded company. Transitioning from a private entity to a public listing may involve the adoption of accounting standards your company never had to previously account for.

This includes written documentation under PCAOB and SEC standards for all significant accounting positions, policies and internal controls, such as:

• Revenue recognition
• Complex capital structures involving debt and equity
• Stock-based compensation
• Income taxes
• Earnings per share
• Segment reporting

You’ll also need to meet all applicable GAAP and SEC requirements, including:

• Filing Form 10-Q quarterly and Form 10-K annually
• FP&A to properly analyze historical and current financial results as well as provide reliable financial forecasts
• A system of ICFR that’s adequate to ensure accurate and reliable financial reporting and, ultimately, SOX compliance, when required

2. The Financial Crystal Ball: Are Your Forecasts SEC Bulletproof?

As a private company, it’s one thing to make forecasts that stay internal. It’s a completely different matter making public forecasts that can directly impact shareholders’ buy-sell-hold decisions while also meeting strict SEC guidelines. It can be art and science—not to mention a difficult balancing act—if you’ve never done this before.

At a minimum, you’ll need to answer the following:

• Do you understand the sensitivity and short- and long-term implications around any changes in key assumptions?
• Have you evaluated the trend of your historical financial results and how they track to the proposed trajectory of your forecasts?
• Have you accounted and vetted for all relevant assumptions?
• Are there new economic, geopolitical, industry, or even local factors that could impact your future financial results? Have they been fully accounted for, especially in light of all the pandemic-adjusted forecasts?

3. Build It and It Will Last: Do You Have an Effective Corporate Governance Structure?

It’s one thing to have company founders and early employees sitting around a conference table hashing out ideas and making decisions based on consensus. It’s quite another matter having a formally elected board with outside officers following Robert’s-Rules-of-Order-like procedures to ensure proper governance is followed.

A number of factors to consider:

• Does your board have both the functional requirements needed (operations, accounting, strategic planning, marketing, etc.) as well as the diversity of stakeholders that many investors are expecting and measuring?
• Have you designated someone to manage board matters, even if it’s only a small part of that individual’s day-to-day responsibilities? Is that person familiar with the best practices of board management for companies like yours?
• Have the roles and responsibilities of board members been clearly communicated? Is there a regular cadence of communications to board members so they’re apprised of ongoing developments and can make informed decisions?
• Have you created an audit committee as required by the SEC rules and requirements for listing on a national exchange? Are they actively involved in the audit process?

Finally, SPACs will continue to be a great option for many companies, but before moving forward, we recommend checking these and other boxes. And in some instances, they must be checked. Think of it this way: You want to take your company to a new destination, but like the airplane mentioned earlier, it pays to go through the above points systematically—for all stakeholders involved.

You wouldn’t want to be on a flight that skips its checklist, right? The same should hold true for SPACs. This is especially true at a time when investors and legislators are scrutinizing the industry like never before. It may sound rote and mundane, but it’s that attention to details that can spell the difference between success or failure. The best time to start is now.

Safe travels.

Learn more about what’s involved in becoming a public company and how RGP can support your journey.