Introduction
Launching an IPO is one of the most significant corporate transactions a Company will enter into during its lifecycle. Many companies aspire to be public as it is often seen as the pinnacle of achievement for the growth of the company by its Founders.
There are many benefits to being a public company such as:
Prestige – becoming a public company takes time and a high degree of effort and so it brings with it a certain level of recognition of the standing of a company. This can often bring several positive intangible impacts to the business such as opening up new customer or supplier channels.
Acquisition currency – as a listed entity with a traded stock, public companies often use their public shares as “currency” for transactions. This currency enables a Company to enter into a purchase transaction without the need to raise cash to fund it.
Employee share remuneration – public companies will often reward their employees with share option schemes once public. This enables the Company to provide longer term incentives to employees which more closely aligns employee incentivization with the longer term aspirations of the business.
However, the benefits of being a public company do not come without a significant effort to get there. An IPO is a partial sale of your business and like any sales process you want to reflect your business in the best light possible. Consequently, preparing yourself for the journey that lies ahead is an important consideration in the timeline to IPO and should not be underestimated.
There are many factors to consider when preparing your Company to be IPO ready, some of which are strategic in nature and some of which are more tactical in nature. We look to discuss the most significant considerations of each in this paper. The following are examples of what we would describe as strategic or “external” considerations.
Cultural considerations – quite often in an owner managed business the shareholder, Board composition and management team comprise the same founding individuals. By contrast, in a public company environment, these three “levels” are separated as they all serve different functions and interests. This transition, or cultural change, is often difficult to manage and cannot be underestimated as the Founders move from an environment where their stakeholder base and stakeholder interests change from a small group of individuals closely involved with the business to a much wider group with varying interests and demands placed on the business.
Is IPO right for my Company? – it is an important early consideration to determine whether an IPO is actually the right choice for the business. An IPO is a form of exit and there are many other forms such as sale to a strategic investor or to Private Equity for example. Not all companies are suitable to be listed as they may not be at an appropriate stage of their lifecycle, may not be generating suitable cash flows to pay dividends reliably and regularly to shareholders as well as other considerations.
Which market is most suitable for my Company – another important early consideration is determining which exchange is most suited to your Company to maximize your value and your IPO. Relevant considerations include your geographical footprint, your industry sector (s), investor appetite, peer company listing destinations, comparable valuations, traded volumes and institutional coverage. Weighing up the pros and cons of each of these factors will support your decision as to which exchange is most suitable for your company.
Which businesses to include in the listing group - it is not uncommon for the group of entities to be listed being different to your existing group legal structure. Forming the listing group can sometimes be a difficult decision to make where a group has a range of companies in different industries with different profitability levels, stage of lifecycle considerations, future growth potential and other considerations. Ultimately the group of entities that are listed need to provide the best value to both current and future shareholders and so careful consideration needs to be given to your most appropriate listing group to maximize your value on IPO.
What structure – determining an appropriate group structure, and listing vehicle, is also a key consideration when thinking about launching an IPO. Your listing vehicle needs to be in an allowable jurisdiction as determined by your chosen exchange and also needs to be recognized by investors. Ultimately dividends and cash payments to investors will flow from the listing vehicle and so they need to be comfortable that the jurisdiction provides the necessary investor protection they would expect.
Timing – as with most things in life, timing of your IPO is crucial for a number of reasons. Firstly, there is the concept of an IPO window, being times during the year when investors typically invest in new offerings. There are also a number of uncertainties that are beyond the control of the entity looking to list. These uncertainties include fluctuating market valuations, market sentiment towards a class of stock or sector, general economic uncertainty, and negative sentiment towards equity as an asset class for example.
Timing your IPO is never easy and so it is important that when the time is right, you are ready to execute the Transaction through rigorous planning and addressing your IPO gaps in advance.
Stakeholder engagement – as preparing for an IPO is a process, determining the timing of engaging with key stakeholders in the process is important. One key stakeholder group are your new shareholders which we discuss further below under Transaction Readiness, however there are many more. Your employees are also an important stakeholder group and so engaging with them in advance and articulating your rationale for the IPO, what benefits it will bring to the business, and importantly to them, is a key step in the process. Similarly, your key customers/clients and suppliers should be engaged with at the appropriate time.
The following are examples of what we would describe as more tactical or entity focused readiness considerations.
Governance & Leadership – a key investment decision by any investor relates to how well a business is governed and led. A well-structured Board with a balance of executive and non-executive directors, who have been operating together as a Board for some time ahead of an IPO is a must from an investor perspective. It is important that your choice of non-executive directors bring additional skills and experience to the executive leadership team. This may be for example, geographical experience aligned to the Company’s growth plans, sector experience in a new product or market or a particular technical skill that will supplement the Board composition. In addition, it is typical that your non-executive directors also serve as members of your to-be established sub-committees such as Audit & Risk and Remuneration committees.
Also of crucial importance is the quality and experience of the executive leadership team and their ability to take the Company forward in the way that has been articulated within the Company’s equity story. A significant part of the investment decision is focused on investing in the leadership team. If there are gaps in experience or indeed bandwidth of the executive leadership team, addressing these gaps at an early stage ahead of the IPO is an important decision point so that the team is used to working together as a cohesive unit.
Process & Controls – a listed entity needs to be able to demonstrate that they can safeguard the Company’s assets on behalf of its shareholders. Consequently, having a strong control environment in place is a non-negotiable consequence of being listed. A number of listing jurisdictions include regulatory requirements that mandate minimum standard control environment requirements, e.g. Sarbanes-Oxley in the US, although regardless of exchange requirements, it is an investor expectation.
A strong control environment is one where risks relating to the business are identified, classified (e.g. high, medium, low), mitigated and monitored. Quite often a Company will maintain a risk and compliance register (often under the supervision of a risk/compliance officer) and incorporate a series of controls to ensure monitoring is appropriately managed.
A strong control environment will consider both financial and operating controls.
Technology & Systems
Aligned to a strong control environment is the Company’s investment in its technology architecture. Process improvement and automation are necessary to improve the efficiency of an organization, but also an important consideration when determining if the architecture supports the control environment. Similarly, an effective cyber security framework is essential to a strong control environment and to ensure the Company’s assets are well protected from both internal and external threats.
Policies and procedures
An important consideration in strengthening your control environment is ensuring as a listed entity you are in compliance with a number of areas that previously may not have been front of mind. For example, it will be important to demonstrate that you have policies and processes in place to deal with concerns such as Whistle Blowing, Anti-Money Laundering, Bribery & Corruption, Discrimination and many more.
Of course, it is not good enough to have documented policies and procedures, but rather it is crucial to have these cascaded through the organization with appropriate training and development programs in place to ensure your employees understand, comply with them and are accountable for enforcing/following them.
Functional enhancements
It is quite common that as a business grows its support functions such as Finance, Human Resources and Operations don’t grow at the same pace. An element of investment will therefore be required across functions to support the business as a listed entity. Typically, the level of responsibility and requirements placed on functions increases as a listed entity.
This is perhaps no more commonly seen than in finance where the finance function has increased responsibility for external reporting as an example. Quite often listed entities will need to report to the market timely on either a six-monthly or quarterly basis. Increasing the capability of the function, including the hiring of additional finance talent is an important consideration when thinking through how the finance function needs to change to support the Company as a listed entity.
There will also be requirements for bringing additional functions on stream. An investor relations function will need to be developed to facilitate interactions with the Company’s new stakeholder base, although this can be outsourced at least in the short term. Additionally, a compliance function will need to be developed to deal with the Company’s broader compliance responsibilities.
Taxation considerations
In addition to tax considerations relevant to the Company’s operational jurisdictions there may be tax considerations relating to the jurisdiction of the listing vehicle. Investors will invest into the listing vehicle and so choosing a tax efficient jurisdiction will be a key consideration for your investor community. In addition, your IPO proceeds will be utilized within operations and so ensuring the flow of funds into the business are tax optimized is also important.
Training considerations
Understanding the implications of being a public company including matters such as directors duties and executive leadership responsibility will inevitably require your organization to enhance its training and development programs. This starts at the Board level where a clear understanding of the role of the Board, KPI and performance metric setting together with appropriate annual performance measurements will be an integral part of your transition to keeping on top of the requirements of a public company.
Transaction Readiness
The final piece of the puzzle once the considerations in this paper have been addressed relates to the IPO Transaction itself. The better prepared you are during the readiness phase the better your ability to execute the Transaction smoothly and effectively.
Significant demands will be placed on the leadership team during the listing process with multiple requests for varying levels of data and information. Identifying these requirements in advance and ensuring the Company is capable of producing data and information timely will necessarily make the Transaction process itself much smoother, more efficient, and ultimately enable the leadership team to focus on business as usual. This can often be overlooked when leadership is consumed with completing a Transaction but can also be a risk to the transaction if the business itself is not powering ahead as predicted.
Close
Being a public is a significant event in a Company’s lifecycle and brings many benefits. Maximising the value of the IPO and ensuring it is executed as smoothly as possible is in your best interests. To ensure your IPO is executed smoothly, it is critical that both the strategic and tactical considerations addressed in this paper are properly considered, planned and executed ahead of your IPO Transaction.
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