Is an IPO the right option for you and your company?

Are you at the stage where you either need to raise funds to grow and/or shareholders are looking to sell some of their shares? The capital markets may have caught your eye and your imagination as they have been very active in 2021 with record IPO levels on both AIM and the main market. In this article you will find out what you need to know and think about to decide whether an IPO is the right choice and how to make a success of it.

• Why are IPOs so popular?
• What are the alternatives to an IPO?
• What are the risks of an IPO?
• How to get ready for IPO?
• What are investors looking for in an IPO?
• What to consider before you start an IPO?

Why are IPOs so popular?

An IPO is a great way to raise money and create a sense of credibility in the market. It gives your company an opportunity to raise long term capital by issuing new shares or by selling existing shares to new investors. An IPO lets the company diversify its ownership, allowing individual or institutional investors to hold shares. In attracting a broad range of investors, the company can help promote liquidity in its shares while on the market.

IPOs are usually followed closely by the media, which can help enhance a company’s profile and attract further interest after admission.  An IPO works best when your company has a growth story that needs to be financed.

What are the alternatives to an IPO?

The stock market can be a great mechanism for raising money. However, the success of an IPO depends on many factors some of which may be unrelated to the company and beyond your control.  A negative market sentiment, a lack of analysts that understand your sector and the demands of investor relations can all impact on the success of an IPO.

At the same time, there are an abundance of private equity and VC funds hungry for investments. Private companies have been able to achieve significant scale by raising private funding. You may want to consider these alternatives as the next step for your business before or instead of an IPO.

What are the risks of an IPO?

An IPO involves more than just publishing a document and meeting with potential investors.  There are a lot of factors and potential issues to consider in the months before an IPO. You also need to understand the rules and reporting requirements to follow after the IPO has taken place.

PROS

CONS

Access to funds for growth New shares can be used as consideration for future acquisitions Lower cost of capital than private equity Enhanced profile of the company and its goods or services Improved credit rating Opportunity for owners to establish a market value for their shareholdings, and realise part or all of their investment Enhanced management and employee motivation through share schemes Provides an opportunity for existing shareholders to participate in future growth

Monetary and time costs of the IPO process Increased regulatory and reporting costs and draw on management time Public scrutiny and accountability Reduced control over the business, and vulnerability to an unwelcome takeover bid Small companies may not find marketability of shares has increased due to low trading volumes Pressure to achieve short term results Share price movements may lead to stakeholder concern Not a short-term exit route for all shareholders

For a successful IPO, you need to convince the market of your ability to grow and show a clear track to rising profitability.  A public company’s valuation can depend on meeting earning expectations and the market’s sentiment as much as the company’s own actions.  You will need to think carefully about contingency plans if the IPO fails to deliver your objectives or there is not enough interest from investors.

If, as a public company, you do not meet your earning expectations your share price will be impacted immediately following the announcement.  When you are a private company, you may have time to correct this before publishing your results and stakeholders are exposed to the news. Once you have a negative sentiment in your share price and investors are “selling” your shares, it can be difficult to turn this in the positive direction.

How to get ready for IPO?

Your decision to go down the IPO route must be based on a realistic assessment of your business, the management team, the stage of development and the prospects.  You will need to improve operational efficiency and resolve any issues that may adversely affect the listing early on. You will also have to examine your business’s readiness for increased regulatory and investor scrutiny.

An IPO is a long process and can be onerous, typically taking six to nine months during which time you will have to dedicate substantial resources to it. The IPO process places a substantial demand on the key management team, leaving less time for them to carry out their daily jobs of running the business. 
Laying the groundwork well before the actual IPO process starts allows for a smooth and efficient process and gives you the ability to take advantage of the optimum IPO window in the capital markets for your business.

What are investors looking for in an IPO?

What to consider before you start an IPO process?

There are some key questions and points your management team need to consider before starting the IPO process and becoming a public company.

Equity story and peer group and market positioning

• Does your company have a natural listed peer group and how does it compare?
• What is the most advantageous sector positioning for your company?
• What is the valuation range?
• Find out about any other likely IPOs in the sector which may impact timing
• Does the company have a clearly defined vision for the future performance of the business that can be articulated credibly, clearly and be quantified?

Corporate structuring and taxation

• Do you need to change the corporate structure and jurisdiction to make it acceptable to investors?
• Is your corporate structure optimised for tax purpose on IPO and beyond?
• Are your group’s tax affairs up to date and in order?

Remuneration schemes

• Have you got the right share and incentive schemes for directors and employees?

Financial projections

• Do you have financial projections for at least 18 months from the anticipated date of IPO? These will form the basis of the working capital review and need to suitably detailed and capable of being easily flexed for sensitivity analysis.
• Do you have longer term financial projections (3 years plus) for valuation purposes?
• How leveraged is your business? Excessive leverage can create negative investor perceptions and be detrimental to a successful IPO
• Investors may not like funds being raised on IPO to repay existing debt compared to funding growth plans

Dividend blocks

• Have you thought about a post-IPO dividend policy? Dividends cannot be paid out on an aggregate reserve’s basis, so an early exercise is recommended to ensure that there is a clear path from the trading companies up to the plc for distributions

Administration

• Have you got all your key contracts, financial and tax documentation ready and available for the due diligence and legal verification process?

Historical financial information

• You will need to prepare and audit three years’ financial information under IFRS.
• Include and audit additional financial information on any significant acquisitions in the last three years
• You must consider and prepare for any issues that may arise as a result of separation from Group

Financial position and prospects

Financial reporting and accounting issues are a common cause of delays in the IPO process 

• Are your accounting systems and controls appropriate for a public company? Do you have  monthly management accounts, robust budgeting/forecasting and a reporting timetable?
• Are you ready for due diligence?
• The market will expect your company to have proper financial controls in place

Management team and board 

This is probably one of the areas with the most significant changes for a company coming to market. A growing private company often has an entrepreneurial management with a lean executive board and the prospect of inviting independent outsiders whose role includes challenging management, vetting key decisions and setting remuneration guidelines may not be attractive.

• Does your management team have sufficient depth and breadth to run a public company and be accountable to shareholders?
• Do you have the rights executives and non-executive directors (“NEDs”) on your board to provide the expertise you will need?
• Are least half of your board, excluding the Chairperson, independent NEDs? If not, you will need to address this
• Do you currently have a single Chairperson and Chief Executive as these should be exercised by separate individuals?
• Have you established the Audit, Remuneration and Nomination committees that will be required?
• Is your finance team suitably resourced to deal with the reporting timetable of a public company? You may need to appoint a specific project manager

Corporate Governance

• Do you understand what changes are needed to comply with UK corporate governance code?

Level of funds

The funds that can be raised will depend on investor appetite for your business, your strategy, and the proposed use of funds.

• Consider alternative scenarios such as raising fewer funds than planned and the implications of this for the business plan
• What is the appropriate valuation of your company? How will the funds be used to develop the business and how much money do you need to raise at IPO?
• Do you need to raise additional funds in the market going forward?

Investor relations

Investor relations are an important part of any successful IPO, but they can also be a distraction from managing the company.

• Is your company ready for the additional scrutiny from a new set of shareholders?
• Who will be responsible for interacting with existing shareholders, potential investors, research analysts and financial journalists?

The above may seem like a long list of questions and needs but in reality, it is only a fraction of what is required along with the stamina needed to deliver a successful IPO.  If you are confident of coping with that and more with the guidance of the right professional advisors, an IPO can be a good option for you to pursue and could be great for the future of your business.

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