What is it that drives a company founder to float their business on the stock market and do an initial public offering (IPO)? The obvious point is that they want to raise capital to fund their growth and/or provide an exit for current shareholders. By entering the public markets, a company can tap into a far wider pool of private investors than it might previously not have had access to. But this isn’t the only factor which makes an IPO attractive. Sometimes an IPO is also about the company maintaining de facto control compared to other options such as a trade sale. The key point is that sometimes an IPO is the right solution, and sometimes it’s not. Growth businesses have an array of options: from private equity to various types of debt financing. As a founder, you need to weigh up all those options. So what should you be thinking about if you’re considering an IPO?
First, it is difficult to be prescriptive about the size or stage of development a business needs to be at before it can IPO. You often find interesting tech companies that see markets like Aim as a source of capital, even if they are both small and have very little revenue at the time of flotation. In fact, what it really comes down to is whether you, as a business, have proven something. Do you have a good track record? Do your prospects look attractive? Can you continue to grow? What is the management team like? So even if your company is currently on the small side, don’t discount the IPO option.
Second, it’s important not to underestimate the impact that an IPO can have on your business. While I’m not sure it materially affects day-to-day operations, if you previously owned 100 per cent of your company, you will suddenly have shareholders to look after. Your business will be subject to new scrutiny, and there will be a requirement to be completely transparent in your reporting and to take corporate governance seriously. Your boardroom will be filled with non-executive directors, responsible for looking after the interests of all your shareholders, and you will have to build relationships with them. While some founders can find the pressure to hit their numbers every half year quite difficult, it's important to stress that most businesses don’t find their new corporate governance responsibilities post-IPO problematic. They’re just something they have to adjust to.
Third, don’t underestimate the time an IPO can take. It will be a distraction for management, as they have to engage with bankers, lawyers and accountants. Sometimes it can take longer than the company thinks, as it is not always in the state of readiness it thought it was in, and that can make the process more onerous. Like private equity, it is also fairly invasive, though from my experience the vast majority of founders are comfortable making information about their business public. One of the most important steps you first take is appointing the right advisors, who not only understand the business but are able to offer advice on the range of options available, and then manage the process, based on what is best for the business – even if that’s not an IPO.
Generally, the market is healthy and a good business can be floated whenever it wishes (albeit sometimes at a cost). There is a cycle, and at different times investors and markets will want different things. But business founders should not be put off an IPO by fears about the state of the market. It is far more important that they receive the right advice such that they can properly weigh up the alternatives, such as private equity, before concluding that floating on the stock market is the best option for their business.
This article is provided for information purposes only and should not be construed as advice of any nature. The views and opinions expressed are subject to change without notice.