For many business owners the key attraction of an IPO, or initial public offering, is that it’s an efficient way for your company to access more capital and for you to realise some of the value in your business. Set against this, the key concern is usually the sometimes lengthy and complex process involved in preparing for an IPO. There are, however, many other aspects of going public and it’s important to consider all of them before deciding if it is the right route for your business.
Five key benefits
Increases cash and long-term capital.
An IPO can deliver the funding to drive growth, increase working capital and pay off debt. It can also provide future opportunities to raise further funds and undertake acquisitions.
Provides greater liquidity and a potential exit strategy.
As well as realising cash through the sale of some of your shares to new investors on IPO, you will almost certainly retain a major shareholding in the newly floated company. This will be far more liquid than before the IPO, allowing you greater flexibility to realise cash and/or exit the business in due course. If you choose to stay invested, you will reap the benefits of any share price growth and dividends.
Supports higher market values.
The greater disclosure of financial information required of a public company can reduce investor uncertainty, while the fact that shares are freely traded will increase liquidity and may also support higher valuations. If used effectively, the extra capital generated by the IPO can also increase the future potential, and valuation, of your company through increased investment, M&A activity and visibility.
Enhances prestige and visibility.
A stock market listing can build reputation and support expansion plans. Lenders will look favourably upon quoted companies and potential and existing customers, particularly overseas, are reassured by dealing with a quoted company.
Helps attract and keep key personnel through share option plans.
Never underestimate the importance attached to the confidence and prestige your employees will attach to working for a quoted company and the ability to incentivise them through your quoted stock can significantly align interests.
Five key challenges
Stricter rules and regulations.
Public companies are subject to much more scrutiny than private companies. Getting ready for that level of disclosure and reporting can be a major challenge, but it can also have a positive impact in terms of improving financial discipline and management information.
A demanding process.
Investing time into the often demanding process by preparing the documentation needed as part of the due diligence will reap rewards in the long run. The IPO process can be lengthy so be patient and prepared to woo potential investors.
Meeting the costs.
The costs of going public will always vary due to the many factors that play a role in determining the cost of an IPO. Whilst expenses can be hard to account for in the early part of the process, they can be offset against proceeds the majority of time. Typically the larger expenses are seen during a successful IPO.
Taking a company public can reduce management’s freedom to act on major matters without board or shareholder approval. The need to reveal sensitive financial information in public reports can also present challenges for those used to operating more independently as a private company. This is why it is always better to partner with an adviser who “get you” and you feel you can work with on an ongoing basis to ensure any such issues are tackled flexibly and well in advance.
Pressure to perform.
Public shareholders may be inclined to focus more strongly on current or near-term performance rather than long-term goals and strategies. Excellent communication with shareholders is essential to manage expectations.
Making the right decision for your business
Given that the pros and cons of an IPO can seem finely balanced, the best approach is to look at ways to maximise the positives while minimising the negatives.
One major challenge is that, although no one knows your business better than you do, an IPO will, in many cases, take you into completely new territory. By having the right support to hand, you can deal with any obstacles more easily, while also ensuring that you maximise the value of the business you built up.
As a corporate and institutional stockbroker and investment bank with deep market knowledge, Panmure Gordon has helped many businesses like yours through every stage of the IPO process and beyond. We have been doing this since 1876, so we have extensive and proven knowledge of the challenges you will face and, by being your trusted adviser throughout the journey, we can help you not just for the IPO but often for decades thereafter advising on your strategy, helping with acquisitions and always positioning your business correctly for the next chapter in your growth story.
To find out more about taking take your business to the next level, please contact Patric Johnson.