Transaction Readiness: The Power of Preparation

Learn what transaction readiness is and how companies can be proactive in preparing for a future IPO or liquidity event.

In the face of rising market volatility, some companies may be reconsidering planned liquidity events such as an IPO or private tender offer. You may have heard of the term “transaction readiness,” but what does it actually mean? And, why does it matter?

When we say transaction readiness, we’re referring to the process of enabling shares of a company’s stock to participate in a liquidity event like an IPO and subsequent lock up release, a tender offer, or secondary transaction. For companies considering or actively planning an IPO, acquisition or liquidity event, being proactive about transaction readiness may help mitigate unforeseen issues or delays leading up to the event date while also helping to improve agency over timing.

In this blog, we’ll define what transaction readiness is, why it may be important and what the potential consequences of not being transaction-ready could be for a private company looking to execute a liquidity event. 

What is Transaction Readiness?

At a high level, transaction readiness is the process of proactively preparing for equity to be bought, sold, transferred or acquired with efficient processing, settlement and reporting. Behind the scenes of every equity transaction, there are numerous processes, workflows and considerations for equity compensation administrators and their legal and finance partners to manage. These workflows tend to only grow in volume and complexity as a company expands its shareholder base.

In addition, transaction readiness isn’t a one-off process. Rather, it is an ongoing discipline that’s designed to ensure the parties involved in a transaction can anticipate and manage all the various components before, during and after it has occurred.

Why Transaction Readiness Matters

Transaction readiness may help a company ensure that the output of its equity transaction is conducted, recorded and reported accurately. This outcome may be important for the following reasons:

  1. Data Accuracy and Cleanliness – Every time shares and money exchange hands, there may be direct and (potentially) significant impact on a company’s equity compensation plan. Being transaction-ready means ensuring participant demographic data and ownership information is accurate pre-transaction and any subsequent ownership changes are recorded post-transaction. The availability and accuracy of this data not only saves time and resources, but also allows plan administrators to make better-informed decisions about their equity compensation plans.

  2. Systems and Processes – Equity transactions overlap with many parts of the business, including accounting, payroll, legal and HR. When data is transferred between multiple systems that may vary in integrability and connectedness, there are multiple points along the journey where information can be lost or not connected. A key focus of transaction readiness is ensuring that the right systems and integrations are in place to help achieve data integrity, transparency and connectedness. Streamlining and automating these intricate workflows is a complicated process that may take months, or even years in preparation for an IPO.

  3. Tax and Regulatory Compliance – It goes without saying that equity transactions need to adhere to tax and regulatory laws. Preparing for an upcoming transaction may require the drafting of new mobility policies, calculating tax withholdings for employees in different locations and registration requirements for various equity awards. All of this work can take a lot of time and may require careful planning to avoid unforeseen issues.

  4. Shareholder Support and Education – Ensuring shareholders have the resources and guidance to understand how a transaction may impact them is critical to keeping them engaged. Remember, not all participants are well-versed in equity and what may seem obvious to some, may not be obvious to others. This is why participant education is an important tool in the transaction-readiness toolbox. 

The Potential Risks of Not Being Transaction-Ready

Not being proactive about transaction readiness can potentially expose a company to certain risks, including:

  1. A Poor Shareholder Experience – Shareholders may become frustrated if they feel under-prepared going into a transaction or unable to get their equity or money in time after transaction closing.

  2. Tax and Financial Penalties – Compliance oversights can sometimes lead to unforeseen fines and penalties.

  3. Not Being IPO-Ready – Companies planning to go public or that are in the process of going public may see their IPO timeline delayed if they do not have the infrastructure and systems to support more frequent equity transactions, increased reporting requirements and readiness for the future state of single-day settlement.

  4. Long-term Challenges – Perhaps most concerning for an equity compensation plan administrator is the risk that a small oversight during a transaction could lead to a more significant unforeseen issue in the future. Whether it’s a miscalculation in tax withholding or a discrepancy in holdings information, errors can potentially compound over time and become more costly for the company to remedy.

For companies considering or actively planning an IPO, acquisition or liquidity event, being transaction-ready may help mitigate unforeseen issues and improve transaction outcomes. There are often many different components to an equity transaction, which is why it is essential to work with experienced professionals that can provide support throughout the entire process.

Thinking of going public or conducting a shareholder liquidity program? Morgan Stanley at Work specializes in helping companies plan and executive liquidity events with ease. Our dedicated Private to Public Services Team focuses on helping companies prepare for the rigorous process of going public. Request a free Transaction Readiness assessment.