How can I prepare my business and myself for an IPO?
I’m keen to float my company in the next year or so. What steps can I do to prepare myself and the business for an IPO?
To avoid the problems that a lot of small cap public companies face, as a starting point here are some things you should know about.
The actual listing process itself is not covered here. It’s a very large topic and something that you only need to worry about once you are certain that going public is right for you and your business.
1. Decide if listing is right for your company
First let’s look at the pros and cons of going public.
- Access to new capital and investors.
- Employee incentives and share schemes.
- Credibility – being listed can provide staff, customers and suppliers with added comfort.
- Profile – being listed will mean it’s easier to get press coverage.
- Acquisitions – if you are seeking to grow via acquisitions, listing gives you access to using script to purchase businesses.
- Risk minimisation – reduce or remove personal guarantees from directors when borrowing money.
- Valuation - your businesses value may become vulnerable to market fluctuations, which you have no control over.
- Expensive - the costs of publicly listing are substantial – up to $1 million even for a small listing. And the cost of being a public company can be up to $500k pa.
- Shareholders – you no longer own the company outright which means you have to consider others when making decisions.
- Management control – you will have to give up some management control of the business and ultimately there's a risk that the company could be taken over. You might even be sacked from your current position if you don’t perform to shareholder/board expectations.
- Compliance – public companies have to comply with a wide range of additional regulatory requirements – this costs money and can divert you away from running and driving the business.
- Time – it takes up to two years to prepare and list a company.
2. Understand the public markets
Before you embark and spend money or time on listing, first understand about the public markets. How does it work, what companies are listed, what affects share prices and so on. It might be an idea to also speak to some directors or CEOs of public companies to get their opinions on what it’s like to be listed.
If you don’t have a good handle on the ASX, then you won’t know what you are getting yourself into. Listing sounds sexy but for many companies it is not the right growth path.
3. Research your sector
Get a feel for your sector and understand valuations, EBIT multiples, investor sentiment and liquidity. Every new listing is benchmarked against similar companies in your sector. So if your sector is struggling, then your IPO will struggle to get investor/broker support. If there is strong sentiment, this is a positive thing.
It’s also important to know about your sector and companies within it because investors, brokers and analysts will all ask you things like, “This company is struggling here, why are you different? Your sector is facing a downturn as reflected in these companies – how do you plan to combat this trend? This company is your competitor – how will you defend your market share against them?” and so on.
If you don’t know what’s going on in your space, you will be tripped up by these people who may have spent 20 years researching and investing into your industry or sector. You need to be on par with them in terms of what’s going on.
I mention this because a lot of entrepreneurs simply don’t know what their industry or sector is doing. This is because they are too busy running their own business. Or they simply choose not to. When it comes to listing, you need to know as much (preferably more) than them.
Best to start this process of learning now as it may take several years to really know your space to the level that you need to in order to IPO.
4. Think about your board of directors
Currently your board of directors might consist of you, and your business partner. This will change substantially when you go public.
You will need a board of at least five people who will manage and make decisions about your business. Are you ready for this? Can you take advice and guidance from others?
If not then IPO is not for you.
If so, then you need to start thinking about your board composition, where to find these people, and how to incentivise them.
As a minimum, your board needs to consist of people who exhibit credibility, proven track record of success, been there done that experience, networks, connections, public company background, industry specific expertise and so on.
This way, investors will be confident that the people at the helm of the ship know what they are doing and where they are going so that they can get a return on their investment.
5. Get the right CEO
Just because you founded the business doesn’t mean that you are qualified to run it when it’s a public company. A CEO should ideally have previous public company experience.
Also he or she should have a proven track record of success in your industry, management skills, investor relation skills, leadership skills and so on. In most cases the founder is not this person.
The founder might be an executive director on the board and hold a different role within the business such as Sales Manager, Operations Manager, Financial Manager or head of Science/Technology.
Are you ready to have someone else run your business? This is a big question with needs the right answer - because if you are not public company CEO material, and you don’t want anyone else in that position, then you shouldn’t go public.
6. Kick some goals
Before listing, kick a few goals such as achieving revenue, becoming profitable, doing an acquisition, signing big contracts or supply agreements, securing key staff, proving that the product/service works, etc.
Don’t make the mistake of listing then using the money to prove the business. The market expects perfection so if you fail, even partially (which is highly likely), the market will crucify you by way of dumping your shares, resulting is a reduction of your market value.
Before listing, achieve your key milestones (or as many as you can). You’ll also get a better valuation and investor support at the IPO as well.
7. Do a private capital raising
You should definitely do a capital raising well before your IPO, even if you don’t need the money. Making a private offer will give you insight into the process if raising funds from investors, issuing shares and then having them on your register.
It will also get you comfortable with using professionals such as lawyers, accountants and corporate advisors.
Some companies do several rounds of fund raising before their IPO. Fund raising is tough, even in strong markets, so the more experience you have with this process, the better. It’s absolutely essential.
This is just the tip of the iceberg when going public. If you get this far and you still feel it’s the right way to go, there are still many more steps to take.
Listing can be the best or the worst step that you and your company makes. By knowing more about it, you will be sure that you’ll be making the right step if you choose to do so.