Insight
Going public - is an IPO an option for your business?
March 2016
What is an IPO?
An IPO is the first sale of a company's shares to the public and subsequent listing on a stock exchange. The offer price for shares reflects an estimate of your company's value and the number of shares available. Once the shares are sold they become publicly tradeable on the relevant stock exchange.
Going public - advantages and disadvantages
The reason many companies go public is to raise capital to finance their future development. An IPO offers the best way for a company to raise money based on expectations of future growth and profit - in the last five years, IPOs have raised, on average, more than US$100m.
Once the IPO process is complete, the newly public company continues to have access to capital markets. If the stock performs well and market conditions permit, the company can raise further capital by issuing more shares to new or existing shareholders. This process is quicker than the IPO process.
However, there are also challenges that you need to consider before you begin the IPO process. Let's look at some advantages and disadvantages.
Advantages
- A greater ability to borrow - as the share price grows, equity in the company enlarges
- The ability to raise capital by issuing more shares
- Access to financial instruments that are only available to public companies
- More flexibility when considering a merger or acquisition - you can use shares as payment
- Ability to recruit, motivate and retain key employees with share options
Disadvantages
- Complexity - an IPO consumes time and effort for senior management
- Risk - you may not raise the capital you hope to raise
- Decision making - you are now answerable to shareholders and a board of directors
- Shareholder expectations - you need to meet them
Is an IPO right for your company?
You should not think of an IPO as a fix for your financing needs; more as a way of transforming your business. You also need to consider your ability to handle the process of going public. In fact, your business should begin to behave as if it is public long before it begins the process of going public; investors will expect to see this.
So what does this behaviour look like?
- Well-established and sustainable business model, ideally positioned to make the first move into new markets
- Good product or service with strong brand recognition
- Strong track record of results
- Experienced and credible management team
- Willingness to be transparent and disclose business information.
The alternatives
Before you begin the process of going public you should consider the alternatives. Besides more traditional ways of raising finance or selling a business to a willing buyer, there are options that are similar to an IPO.
Private placement
This means offering shares in your business to a small number of institutional investors such as insurance companies and mutual funds. A private placement is less complex, with limited regulation and reporting requirements.
Reverse merger
This is the process where a private company effectively becomes public by buying sufficient shares in a public company. This is typically cheaper and less time-consuming than an IPO but no use if you need to raise capital.
Private equity sale
This involves you selling equity to a private buyer, usually institutional investors. This happens outside a stock exchange environment and is cheaper and less time-consuming. However, it dilutes the equity for existing shareholders.
The professional advisers you will need
Taking your company public is a complex process that will take between six and twelve months to prepare and complete. To make this achievable you will need to instruct external advisers with specific expertise.
Underwriter: Your underwriter will be an investment bank and is responsible for making your shares available for sale, structuring the transaction, and setting the price. The underwriter also provides market support after the sale is complete.
Independent auditor: Your auditor will audit your company's financial statements for the last three years in line with international financial reporting standards. The audit process will also include the financial data in the sale prospectus and other documentation such as due diligence and working capital reports.
Legal counsel: Your lawyers will draft all the transaction documentation necessary for the IPO process.
Public and investor-relations consultant: Your PR consultant will introduce your company to investors as an attractive investment proposition while also building your entire marketing and communications strategy.
In summary
Embarking on the path towards an IPO is not a decision you should take lightly. The IPO process is long, time-consuming and expensive. Whatever your reasons for considering it, think about the alternatives too. If you then want to proceed make sure you appoint the right advisers.
If you do it for the right reasons and prepare properly, an IPO can work wonders for your business and its reputation.