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NOVEMBER 25, 1999

DIGITAL MANAGER

Testing Your IPO-Readiness on the Web
Ernst & Young says its IPO Navigator can save you consultants' fees


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What entrepreneur hasn't considered an initial public offering with the stock market at these frothy levels? It takes a lot more than a dream to list your company. In fact, it's a daunting process, and many entrepreneurs find they need all the help they can get to survive it.

With that in mind, accounting giant Ernst & Young has created IPO Navigator, an Internet-based service that helps entrepreneurs whose businesses are one to three years away from an IPO to assess their readiness to be a public company. Entrepreneurs use a series of interactive worksheets to score their businesses on such things as information technology management, financial-reporting capabilities, and management goals. IPO Navigator will even tell you if your projections are off-base and you shouldn't go public. All from the comfort of your office or home. What's the catch? Well, it'll cost you $4,000 a year for starters.

While that sounds pricey, the rationale is that entrepreneurs can tap into E&Y's wealth of experience for a fraction of the $50,000 it says live consultants would charge just to determine if you're publicly tradable material.

And IPO Navigator seems like a great idea. One thing appears certain, though: It's not for dot.com entrepreneurs who want to go public tomorrow. Working through IPO Navigator is so time-consuming that busy entrepreneurs who've tested it say they've only made it through a small amount of the material in a month or more. Another point: IPO Navigator's mission isn't just to pilot you through the shoals of going public, it's also designed to steer you to the firm's other consulting and accounting services. E&Y is unabashed on this score: "To the extent there are other services we can provide, we identify those at the site," says Brian Baum, national director of online consulting for E&Y.

No question that more entrepreneurs want to go public than ever. According to Thomson Financial Securities Data in Newark, N.J., 608 companies filed to go public as of Nov. 2, 1999 — 35% more than in the same period last year. IPOs have raised a record $50 billion this year so far, up nearly 40% from last year.

So how can IPO Navigator help you tell if you're ready to tap the gravy train? Here's how it works:

You sign up and pay for the Navigator at http://ipo.ey.com, logging on with a password when you use it. This area of the E&Y's site is divided into 11 sections that guide you through the phases of an IPO. They're divided in turn into 27 subsections, with a total of 365 questions, 14 worksheets, and 6 suggested readings.

TOUGH SELL? One problem with the Navigator is that its complex questions don't seem to lend themselves to the format — entrepreneurs respond by rating themselves on a scale of one to seven. For example, under "Meeting Investor Expectations," the Navigator asks: "How well positioned are you to fulfill your company's long-term vision, while still being able to meet investors' quarterly expectations?" and "How completely have you identified how the proceeds from the IPO will be used?" Baum says the questions are meant to test entrepreneurs' confidence that they've addressed each issue. The last question really means: "Are they comfortable that they have identified the use of the proceeds or not," he explains.

A score of less than four shows weakness. Based on your weaknesses, the software draws up a "to-do list," with links to worksheets and recommended readings. Have a weak business plan? A comprehensive outline will show you how to create one. Inefficiencies in your major processes? Navigator pulls up flow charts that help you think through sales and supply-chain management or the way your IT system currently works. Feeling overwhelmed? E&Y makes a pitch at this point for its fee-based online and conventional consulting services.

Will entrepreneurs sign up? It seems like a tough sell: Entrepreneurs could just as easily do what they have been doing for years before deciding to take the plunge — read up on the subject, and consult their lawyers, accountants, and investment bankers. E&Y contends small-business owners are so blinded by IPO frenzy that few actually realize the extent to which their companies must change to go public — and in ever shorter periods. That's one reason, they say, that many companies have trouble meeting their post-IPO financial targets.

At least one investment banker agrees. "The willingness of the public to finance companies at an early stage is far greater than it has ever been," says Christina Morgan, co-director of investment banking for Hambrecht & Quist in San Francisco. In such an environment, she thinks IPO Navigator sounds like a good idea. "The more information [entrepreneurs] have, presumably the better decisions they can make, and $4,000 is not a large number in the scheme of things for most corporate budgets," she adds.

NONPAYING TESTERS. Still, for those who don't want to pay for a detailed interactive service, There's plenty of free material on going public, though nothing Business Week Online found was directly comparable to Navigator. Sites like IPO.com and Hoover's IPOcentral.com answer basic questions about the process and list underwriters, accountants, and law firms that specialize in taking companies public. The Going Public Sourcebook, available for free from R.R. Donnelley Financial (800 424-9001), lists in great detail the steps leading up to an IPO. Several other Big Five accounting firms offer free information on their Web sites as well. For companies that have already decided to go public, Deloitte & Touche has something called the IPO Timetable, an interactive calendar of the steps leading up to an IPO. It's working on a free Web tool to help companies assess their IPO readiness, too. Laurie Moss, the company's national marketing director for growth company services, would only say that it will be used to guide the appropriate clients to Deloitte & Touche's fee-based services.

IPO Navigator was rolled out in October, and though Ernst & Young says it has paying customers for it, it would only refer Business Week Online to nonpaying testers who continue to use the tool. Frank Tilley, chief financial officer of the Sentry Group Services Inc., a Fort Worth-based funeral-home chain, logs onto it every two to three months for a few hours and has worked through about a fifth of it. His five-year-old company, which has annual revenues approaching $20 million, was founded with the intention of going public, a goal that's still three years away. Though he didn't pay for it, he thinks IPO Navigator would be worth $4,000 because it has helped his company identify several potential problems. For example, the company hadn't given much though to whether the rank and file was as motived as management to reach for an IPO. Now it's considering incentive plans and stock options.

Another entrepreneur who says he'd pay for the Navigator is C. Kent Harrington, president and chief executive officer of Cathedral Rock Corp., a chain of assisted-living facilities based in Fort Worth. He says the Navigator has helped him focus on the need for a strong CFO and consider other ways to recoup his investment in the company than an IPO. For the last month or so, he and other senior managers have devoted a few hours a week to it, completing about 25%. "It's not a daily occurrence, I have a business to run," says Harrington.

How well entrepreneurs will take to IPO Navigator is hard to say. This isn't E&Y's first foray into discounted online small-business services. In 1996, it introduced Ernie, a Web-based tool that, for $5,000 a year, lets entrepreneurs query its consultants, who respond via e-mail within a day. After three years, however, Ernie has only 1,500 corporate users.

Solitary self-assessment tools like the Navigator may be more efficient and cheaper than tapping live experts, but it seems unlikely they'll replace the ongoing dialogue entrepreneurs have traditionally had with their advisers.



By Jeremy Quittner in New York

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