What considerations are needed before going public?
In this guest article written exclusively for Business Leader, Imran Anwar, the Chief Financial Officer at Epos Now, covers what must be considered before taking a business public.
The post-Brexit stock market has seen an upsurge in IPO filings for UK companies. 14 IPOs were launched on the main market, and 19 more AIM raises have made 2021 a record year so far, with £2.9 billion raised.
With so many companies looking to access the public markets for funding, it is essential for all entrepreneurs considering an IPO to fully understand the process. The IPO journey is a long, arduous process that can test the most experienced of entrepreneurs and management teams. Just because your company raises capital in the public markets does not mean you’re immune to failure.
What are the benefits of an IPO?
There are a number of benefits to going public. These include:
- Exposure: being a publicly-traded company can help boost your brand awareness.
- Validation: an IPO provides validation of the business model and the future strategy. Investors are putting significant funds into helping you deliver it, which they wouldn’t do if they had concerns about the business’ strategy.
- Global capital access: as a public company, you will have access to capital from investors around the world, giving you the ability to expand your business.
- Board oversight: a public company often has a strong independent board to provide oversight for your business.
- Increased liquidity: as a public company, you will have enhanced liquidity and can take advantage of opportunities to raise capital through equity offerings.
But with great opportunity comes great responsibility. There are also a number of considerations you need to take into account before embarking on the IPO journey.
Five key considerations for the IPO journey
Have a clear strategic focus
When you go public, you’re inviting the world to invest in your company. It’s, therefore, important to have a clear articulation of why you’re going public and what your business stands for. For example, it could be the first step in a much larger plan to build an empire (growth stock), or you can use going public as a means to an end (value stock). It’s important to be clear about your strategy and articulate it to potential investors so they are clear on what they are buying into and there are no ‘surprises’ down the line.
Understand the risks and challenges associated with an IPO
There are a number of risks and challenges associated with going public, such as:
- The increased scrutiny from regulators and shareholders;
- The potential for negative publicity; and
- The cost of being a public company.
Understanding and preparing for the challenges associated with being a public company can help minimise these risks and make the process and post-IPO journey much smoother.
Have a robust financial model
Many new companies experience a steep learning curve financially. They come to realise their financial models are put under much more scrutiny. The models need to have finer margins of error than ever before as they are often used to guide analysts and investors on short-term and long-term performance metrics. This means you really need to know what drives the underlying business performance and monitor those KPIs and take action immediately when they vary from expectations.
Speak with your CFO beforehand
Your CFO will be a major player in the IPO journey, so it’s important you discuss how they see the IPO impacting on you and the team. Your CFO will likely have their own ideas, which you should consider and reflect on. Remember, they are in charge of the company’s finances and play one of, if not the, most significant roles in the IPO journey.
Speak with your professional advisors beforehand
Likewise, it’s important to speak with your professional advisors before you go on the IPO journey. They will be able to give you an idea of the process, the questions you should be asking, and where potential pitfalls may lie. They can also help to mitigate costs by speaking with others in the industry and identifying early if there are any gaps in your plan.
Have a strong corporate governance structure in place
The one thing that could unravel an IPO and lead to its failure is weak governance. It takes a long time and lots of effort to build a strong corporate governance infrastructure, but this could make or break the IPO journey.
The process begins with appointing key roles, such as the executive and non-executive directors. This involves developing and evolving policies such as remuneration policy, risk policies, whistleblowing policy, and social and environmental policies. This may not seem like something you need to do before an IPO; after all, you don’t want your company ideas shared until you reveal them on your IPO roadshow. However, having these policies in place will demonstrate to potential investors that your company is well managed and has a good foundation and culture.
The underlying objective is to give investors the confidence that their investment is being appropriately managed and their best interests protected.
Be prepared to face challenges in the early stages of going public
The early stages of going public can be challenging as you adapt to the new regulatory environment and investor scrutiny. In order to ensure that the company is dedicated to transparency and ethical operations, directors should be aware of compliance issues associated with the company and how to deal with them.
By putting in place a robust IPO plan, knowing your investor base, and ensuring you have the financial capability, you will be setting yourself up for success. Working with an experienced adviser can help to give you an advantage in this exciting journey. Building relationships with all stakeholders as early as possible will benefit you in the early stages post-IPO.
Ultimately, the journey to an IPO is not without its challenges. However, if you’re prepared for the challenges and have a clear strategic focus, an IPO can be a great way to raise capital and expand your business.
When considering an IPO, it’s important to understand the many considerations that go into the process. This includes having a clear strategic focus, being prepared to share your strategy with institutional investors, understanding the risks and challenges of going public and having a robust financial model.
Additionally, it’s important to have a strong corporate governance structure in place and be prepared to face the challenges of being a publicly-traded company. By keeping these things in mind, you can make the journey to an IPO as smooth as possible.