Foreign-backed U.S. Startups Find Preparation is Critical on the Long Road to M&A or IPO

Foreign‑backed startups often enter the U.S. market with a clear long‑term ambition: achieve a high‑value exit through an acquisition, a merger or an initial public offering. Many founders say they came to the U.S. to go public, though the reality is more nuanced. In today’s softer IPO market, M&A is often the more likely path. Regardless of which exit ultimately materializes, the preparation required is substantial — and it should begin years before a transaction.

A U.S. IPO typically requires two to three years of audited financial statements, depending on whether the company qualifies as an Emerging Growth Company, or not, and often involves one to three years of readiness work. M&A transactions are even more timing‑dependent. While there is no uniform financial statement requirement, the availability and quality of historical audited financials at the time of the deal often dictates transaction feasibility, speed, and valuation. Many foreign‑backed startups underestimate this timeline, especially those with minimal revenue or those waiting on regulatory approval in biotech, pharma, medical device, or deep‑tech sectors.

Preparation for an M&A event or an IPO ideally should start the first day the U.S. operation opens its doors, and owners must anticipate that it will include expanded groundwork to ensure that compliance with regulatory and legal filings required of foreign-backed businesses is current.

Some companies are so focused on their primary mission they fail to put the financial compliance mechanisms in place upon startup. Others have operated for years without U.S. GAAP‑compliant books or they have delinquent filings. In all cases, the on‑ramp to a merger or IPO is longer than founders expect.

Building the Right Team

A major readiness issue is the absence of qualified financial leadership. Many startups lack CFOs, controllers, or tax directors. As companies approach an exit, this becomes untenable. Startups that can’t afford in-house financial professionals can work with an accounting firm that offers high-quality outsourced support in critical areas.

Whether in-house or outsourced, companies must have:

• A CFO or controller
• HR and IT leadership
• A culture that supports compliance and documentation

An accounting and advisory firm can help a company assess organizational readiness and identify the roles needed to support a transaction. While external advisors can prepare financials and tax provisions, companies must ultimately show they have the internal capability to operate as a compliant U.S. entity.

Financial Statement Readiness: The Heavy Lift

Financial reporting is often the most time‑consuming component of exit preparation. Many foreign‑backed startups have never undergone a U.S. financial statement audit. Moreover, they lack supporting documentation, or rely on foreign‑parent consolidation that does not follow U.S. GAAP.

Common issues include:

• Multi‑year cleanup of books
• Missing documentation for capitalization vs. expense decisions
• Incorrect or incomplete accounting for revenue recognition, leases, goodwill, and patents
• Lack of reconciling schedules needed for audit readiness
• Financials prepared under foreign standards rather than U.S. GAAP

Some founders anticipate a future exit and maintain clean records from day one. Many do not. During M&A due diligence, these gaps become immediate obstacles.

Internal Controls: Moving Beyond Startup Mode

Startups often operate with informal processes, limited documentation, and minimal segregation of duties. While this may be acceptable — though not ideal — in early stages, it becomes a liability as companies approach an exit. For this reason, putting strong internal controls in place from the start is the best practice.

Key internal‑control challenges include:

• Lack of documented accounting cycles
• Inconsistent review and approval processes
• No evidence of control operation
• Overreliance on a single individual for multiple financial functions

An accounting and advisory firm can provide guidance through each accounting cycle with the company, establishing best practices and building the internal‑control framework expected in due diligence and, eventually, SOX environments.

Tax Readiness: The Most Overlooked Risk

Tax compliance is frequently the weakest area for foreign‑backed startups. Many have not filed required U.S. tax returns, do not have the experience needed to prepare tax provisions, and have never completed purchase accounting for prior acquisitions. These gaps can materially affect valuation and delay or derail a transaction.

Key tax issues include:

• Missing or incomplete tax returns
• No tax provision calculations or tax footnotes in financial statements
• Incorrect or missing purchase accounting
• Determining the type of acquisition (A–F reorganizations) and whether it is a taxable transaction or not
• Exposure under Section 280G for executive compensation
• Net operating loss (NOL) limitations, including Section 382
• Missing or materially incorrect deferred tax asset schedules
• International compliance gaps, including VAT and foreign‑filing requirements

An accounting and advisory firm can prepare tax provisions, identify exposures, and help structure transactions appropriately, ensuring companies avoid surprises during due diligence.

Quality of Earnings and Valuation Support

Financial and tax readiness often pairs with advisory services that help stakeholders understand the company’s true economics. An independent advisor can coordinate multiple services to help move the process forward:

• Quality of Earnings (QOE) studies
• Valuation analyses, including the impact of deferred tax assets
• Integration of financial, tax, and operational findings into a cohesive readiness plan

These services help companies present a credible financial picture to potential acquirers or investors.

Sector Considerations

Planning for a transfer of ownership requires a vision of what the company will look like on the other side. Will it be absorbed by a large corporation? Will it be held by private equity with the current owners still in management positions? Or will it be bolted onto a similar-sized company with a synergistic product line?

If the founding owners continue to be involved in the company, it will be essential to envision the skills and talents that will be needed post-transaction.

Foreign‑backed startups often cluster in:

• Biotech
• Pharmaceuticals
• Medical devices
• Software
• Technology

Biotech and pharma companies may have no revenue for years while awaiting FDA approval. Founders with scientific backgrounds often lead through the R&D phase, but commercialization requires new leadership with business, marketing, and operational expertise. These transitions must be planned well before an exit.

We’re Here to Help

Foreign‑backed startups come to the U.S. because the market offers deep capital pools, strong valuations, and a robust innovation ecosystem. But the expectations for financial transparency, tax compliance, and internal controls are high. Companies that invest early in readiness — financial, tax, and operational — are better positioned to seize opportunities when the market opens.

JLK Rosenberger’s role is to guide these companies through the preparation process, ensuring they have the financial and tax infrastructure needed for a successful M&A transaction or, when conditions improve, an IPO.

For more information or a discussion about your startup company’s preparation for exit, contact your JLK Rosenberger team member, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.