It is the dream of many entrepreneurs to start their own businesses, grow the businesses and eventually take the business public. However, a public listing may not be the natural progression once your company has grown to a certain size or profit level, nor is it the be-all-and-end-all.
The preparation for an Initial Public Offering (IPO) requires total commitment on the part of the entrepreneur and his management team. They need to look beyond the advantages and glamour, and be fully aware of what it means to be listed. Here’s an overview of the listing process and some key areas to take note of when embarking on the road to an IPO.
An entrepreneur has to weigh the pros and cons of listing in the light of the company’s plans and goals. Early discussions with professional advisors like consultants, accountants and lawyers can provide the entrepreneur with more specific considerations and perspectives.
1. Alternative To Bank Borrowing As Source Of Financing
- Bank loans have been the most traditional means of financing for most SMEs. An IPO provides an alternative to relying on bank funding which normally requires fixed repayment commitment including interest. On the other hand, there is generally no need to repay the capital provided by shareholders. Dividends due to shareholders, if any, are declared at the discretion of the management and the company is not subject to fixed payment terms.
2. Ready Market For The Company’s Shares
Investors may buy or sell shares of a listed company in the stock exchange. The entrepreneur can thus reap the fruits of his labour by selling his shares in the open market.
3. Ability To Conduct Merger And Acquisition (M&A) Activities Using The Company’s Shares As Consideration
As there is a ready market for a listed company’s shares, the company is able to use its shares in place of cash as payment for the acquisition of a potential target company. Similarly, the market value of the company could form the basis of a valuation of the company should the entrepreneur decide to sell his stake in his company, or merge his company with another.
4. Enhanced Image And Status Of The Company
- A listed company is generally seen to be more prestigious, stable and financially viable than a private company, having passed the scrutiny of regulators in the listing process. Certain companies, especially MNCs, may hence give preference to listed companies in awarding contracts. A listing in this instance thus opens doors to more opportunities for a company.
5. Ability To Attract And Retain Good Staff And Professional Managers
- The enhanced image and the liquidity of the company’s shares means that a listed company is able to implement an Employee Stock Option Scheme (ESOS) to attract and retain good staff and professional managers. In an ESOS, staff are awarded options which can be converted to shares in the company. The employees will be motivated to work for and align their interests with the company in effecting an improved share price performance.
The cons are related to the way the business will be conducted after a listing:
1. Less Flexibility Or More Bureaucracy In Making Major Decisions
The main adjustment that an entrepreneur would have to make is the significant loss of autonomy in running the business of the listed company. Major decisions are to be made with regards to the interest of public shareholders, some of which would probably require shareholders’ approval. Operationally, interested-person transactions, i.e., business dealings between the listed company and other companies controlled by the directors, CEO, or controlling shareholders (and the associates of such persons) of the listed company would similarly require shareholders’ approval. Shareholders of the company would also need to be mindful of the accumulation of shares in the company as there may be take-over implications.
2. Increased Compliance Costs
A listed company is expected to comply with various stringent regulations, especially in relation to accounting and disclosure requirements that would result in higher standards of information and accountability to public shareholders. A board of directors (BOD) comprising executive, non-executive and independent directors needs to be appointed for a listed company. The BOD acts as the guardian and protector of public shareholders’ interests to ensure that the company is well managed and that shareholders’ interests are not compromised. These requirements will result in more management time, effort, and compliance costs for the company post listing.
3. Risk Of Being Taken Over
Every listed company is susceptible to takeover raids. With the dilution of control from a public listing, the entrepreneur runs the risk of his listed company being bought over to the extent of percentage of shares not owned by him. The entrepreneur would then have to contend with other shareholders that may be less than cooperative.
4. Increased Pressure For Short-Term Performance
With public listing comes closer scrutiny from stock analysts and market players who directly or indirectly drive the share price performance, demand continual good financial performance, and expect dividend pay-outs. The entrepreneur may be pressured to deliver short-term profits or results that underpin the share price performance at the expense of long-term growth and development of the company.
5. Commitment To Investor Relationship Management
Investor relationship management is crucial in communicating to the market the financial performance and decisions of the company. However, investor relationship management demands more management time and effort.
Some of the areas that need to be in place or considered before a listing include:
- financial and management control systems
- compliance with relevant accounting standards
- corporate restructuring
- financial forecasts
- issue of interested party transactions and conflicts of interest
- preparation of proforma accounts to be reviewed by auditors
- preparation of prospectus
- composition of the Board of Directors
Several professional parties will typically work hand-in-hand with the entrepreneur and his management team in the company’s IPO. They are essentially the IPO consultant, lead manager, auditors, lawyers and public relations consultant.
A good starting point for an IPO aspirant is the appointment of an IPO consultant to assess the suitability and readiness of the company for a listing. The key value-add of an IPO consultant is the comprehensive planning and guidance it gives to the management at every step of the IPO process.
He is able to help expedite the execution of the work plan towards a timely and successful launch of the IPO. The consultant would also facilitate the resolution of unexpected issues and road-blocks that may stand in the way of the IPO.
The following are some areas of work undertaken by the consultant in the initial stages of the IPO process:
- Look into which entities should be included in the listing group.
- Address any potential conflict of interest among the entities, or in the shareholding structure.
- Propose a corporate structure and assess the impact on the financial position. In the process, the consultant can also assist in the possibility of unlocking shareholder value.
- Determine the financial period to use, taking into account any need to realign the accounts of the group to the same year-end and to comply with international accounting standard.
- Assess the best way to segment the business and analyse past trends.
- Ensure that all interested person transactions are properly disclosed according to listing requirements and all conflict of interest issues are addressed
Collate information on the company e.g., history, risk factors, business, management team, competitive strengths, and industry prospects in a manner that best presents the listing group in the prospectus, in order to maximise the value of the listing group.
Assess the internal control and reporting systems of the company to ensure adequate controls are in place and comply with reporting requirements.
2-Year Financial Forecast
Translate the business plan of the company into a 2-year financial forecast and ensure that it is consistent with the prospectus.
Preparation For Post-IPO
Guide and help management understand the responsibilities post-IPO, and prepare them for it in the process.
Besides the IPO consultant, the other key player is the lead manager. The lead manager sponsors and manages the launch and liaises with the stock exchange on the listing application.
The road to an IPO is indeed complex and time-consuming. However, with a clear overview of the listing process and the requisite commitment, it may not be as daunting as you might believe it to be.