Is an Initial Public Offering right for my business?

What is an IPO?

Often referred to as a flotation, an IPO differs from alternative sources of funding by resulting in a proportion of an entity’s shares being available to traders and investors on public markets.  Your company ‘goes public’, with its associated benefits, but also now faces greater regulation than previously as a private company.

Could an IPO be right for your business?

IPO funding is sought for a variety of reasons: For business expansion is most commonplace but it can also offer the opportunity to deliver acquisition strategies, reduce gearing, fund product development, attract and retain talent or simply offer a means of improving a company’s profile.  Consequently, the reason for considering an IPO may go beyond those which other forms of fundraising deliver.

Listing your company via IPO often allows control to be retained and although there will be scrutiny from a greater number of outside stakeholders, in many cases, at least from a detailed internal financial reporting perspective, such scrutiny is often less than would be required by a private equity investor.

Generally speaking, making a greater proportion of shares available to the market results in more funding, however additional factors to determine the proportion of shares to be listed include:

• An investment bank or broker’s assessment of the company’s valuation;
• Achieving an attractive initial share price; and
• Anticipated demand.

What do you need to consider when undertaking an IPO?

There are a number of reasons why an IPO could benefit your business and its stakeholders, including:

• For shareholders, it offers an opportunity to partially (or in limited cases, fully) realise the value of their contribution to the business;
• For the company, it provides an introduction of new capital to drive the delivery of a chosen strategy;
• For employees, extra incentives such as share options are possible;
• For other stakeholders, such as customers and suppliers, there is the reassurance of dealing with a company which has achieved recognised levels of corporate governance.

To achieve these benefits, there are aspects of the process which will impact the business and consequently also need to be considered:

• Your management team can become distracted during the IPO’s due diligence process.  It’s a demanding, often underestimated, exercise but with sufficient planning in the preceding 12-18 months, a company can be sufficiently ‘IPO ready’ to minimise that distraction.
• Once listed, additional regulatory and disclosures requirements will be required, including publishing interim financial information and reporting in accordance with international financial reporting standards.

Regardless of the market on which a company lists, partnering with a financial sponsor is recommended:

• Investment banks typically act as financial advisers on main market IPOs, utilising in-house broking teams to identify potential investors.
• A nominated adviser (‘Nomad’) must be appointed for an AIM IPO to satisfy that market’s regulatory requirements, AIM IPO companies sometimes being ‘younger’ than those listing on the main market:
  • If a Nomad has its own separate broker offering, it can handle most aspects of an AIM listing. 
  • Alternatively, a Nomad may team up with a third party broker (sometimes referred to as a bookrunner) to deliver an AIM flotation.

What are the stages of an IPO process?

There are four principal stages to the IPO process:

1) Brokers undertake research on the floating company and presentations are made to potential investors early in the process to establish interest.

2) A period of extensive legal and financial due diligence follows, principally for the benefit of new directors to be appointed on the IPO and for the financial adviser sponsoring the transaction.  The due diligence process initially supports the intention to float statement (‘ITF’) which needs to be made to the Financial Conduct Authority. An ITF summarises the company’s operations, the amount it is seeking to raise and provides an outline timetable from the opening of the offer through to when the shares will be listed on the relevant market.

3) The ITF is usually the trigger for formal marketing to commence, a phase usually lasting four weeks – two weeks of the management team presenting to potential investors, followed by a further two weeks of ‘book building’, a process which seeks firmer indications of investor interest.  With there being limited reference points for a private company’s valuation – no relevant financial analyst reports are available, disclosure obligations can be relatively limited, as can press interest – the marketing phase results in the value of the company being determined. 

4) Thereafter an IPO share price is formally set, potential investors are offered the opportunity to commit to share allocations and a prospectus or admission document is issued.  The company receives its funding shortly thereafter.

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