How do you prepare for an Initial Public Offering?

16/1/2023.
An initial public offering (‘IPO’), also known as a flotation, is a significant milestone for any company. It’s an extensive process, resulting in a proportion of an entity’s shares being available to investors on public markets but one, which if managed appropriately, can be navigated while minimising disruption of the management team’s day-to-day focus.

How do you ensure your business is ‘IPO-ready’?

To be sure your business is IPO-ready:

1) There must be alignment between shareholders and management that a flotation is the best means of delivering the agreed corporate strategy, having established:

Venture capital, private equity or trade sale options aren’t preferred means of capital funding; and
The company and management team are suited to public market scrutiny.

2) Once there’s alignment and a commitment to IPO, a comprehensive business planarticulating the investment opportunity and the company’s ambition is required. Such a plan will be key in the financial adviser selection process and in identifying the right time for the company to come to market.

3) Select a financial advisor and, with their support, agree the preferred timeline for your listing. Having your advisor in place at least 12 months prior to IPO is recommended.

4) With your adviser in place and a targeted listing date agreed, establish whether:

The personal financial planning of existing shareholders is optimised;
Instigating procedural changes or approaching HM Revenue & Customs (‘HMRC’) is required to mitigate corporate tax risks;
Earnings enhancing acquisitions (or the disposal of non-core assets) are necessary;
Possible dividend traps within the corporate structure need to be addressed (with HMRC clearances being sought where required);
Enhancements to the director group or management team are advisable;
Employee incentivisation is sufficiently considered;
The company’s governance and financial structures are appropriate; and
Relevant non-financial, environmental, social and governance(‘ESG’) topics are appropriately embedded into strategy, operations and communication.

If any of these areas are not addressed, the requirement to deal with these aspects alongside requests from lawyers and the reporting accountant during the IPO’s due diligence phase will become a significant distraction for management.

5) The company’s recent financial history must be reported in accordance with one of the FCA’s authorised frameworks - typically international financial reporting standards or US GAAP. Disclosure requirements are significant and any conversion of financial statements from the UK’s FRS 102 to one of the FCA’s stipulated frameworks may need to be outsourced. To address the risk of self-review, the firm appointed as reporting accountant cannot undertake the conversion.

6) One of the reporting accountant’s principal deliverables is its ‘short form’ report, opining on the truth and fairness of the financial information forming part of the circular. The requirement for the true and fair opinion leverages audit work previously undertaken. If your company currently falls below the UK audit threshold, consideration should be given to whether an auditor (which can be your reporting accountant) should be appointed for the financial year immediately preceding the IPO process.

7) With personal, corporate, management, employee and adviser structures in place, now is the time to start thinking about the financial projections which will support the directors’ working capital statement - also a feature of the circular, there being sufficient funding for at least 12 months from the date of admission. A financial model, capable of reflecting adviser identified stress-testing scenarios will be required to demonstrate the robustness of funding and to support the directors’ statement.

Executing the IPO

Having ensured your company is IPO-ready, executing the listing will typically take three to four months and will involve:

1) The due diligence phase, requiring considerable information gathering and management time to address the enquiries of lawyers acting for the company and the financial advisers, and also of the reporting accountant. Providing and managing information flows via a data room is advisable.

2) The entity issuing its ‘intention to float’ statement. At this stage a legally verified circular (or admission document for an AIM flotation) supporting the proposed IPO should be in substantially final form.

3) The investor roadshow where the presentation skills of the key members of the management team are tested. If it goes well, pledges of funding will follow, final meetings will be scheduled and you’re effectively there.

A successful IPO is an extensive process with a number of variables to consider. To achieve the optimal outcome, getting the preparation right will be imperative.

Are you ready?

Get in touch

If you’d like to know more about preparing your business for a IPO, our team of advisors can assist, please use the contact form below.