February 24, 2023
It’s the goal of countless founders, the heady dream of global CEOs, and the fantasy focus of early-stage startups. It is, of course, the moment a company goes public through an IPO. However, despite its presence in the headlines, not much has been written about the acronym. In this article, we break down the basics of an IPO. From the benefits of an Initial Public Offering to how they work, we’ll cover everything you need to get your IPO on the go.
Let’s start with the basics…
An Initial Public Offering or “IPO” is when a private company sells shares of the business to the public for the first time. You may have heard of the phrase “floating on the stock exchange” or a “stock float” which refers to the release of shares to the public via an IPO.
Often a business will divvy out shares prior to its IPO, in particular to its employees and directors. This is often used to incentivise teams, with the sense that they can own a “piece of the pie” they’re creating. It can also be a particularly useful tool to retain or secure top talent.
When a company goes public, the value of those shares becomes influenced by investor demand, or lack thereof, which can trigger existing shareholders to either sell or hold their shares. It’s worth noting, however, that there is often a “lock-up” period for shares when a company goes public, which means employees are unable to sell their shares for a certain period post-IPO.
Below we tackle just some of the many reasons why businesses decide to go public. First up...
In simple terms, an IPO allows a company to secure further investment by way of equity capital from the public. Often, an IPO will provide much-needed funding for key innovations, alongside rewarding long-term investors within the company.
Being listed means that a company’s shares have a market (and one that is liquid and regulated) and therefore gives shareholders the ability to potentially realise the value in their investment.
As there are strict governance requirements for a company going public this is likely to have a knock-on effect to positively improve efficiency internally for a company by improving its systems and processes.
There is a long list of benefits related to an IPO, from securing funding to gaining an improved valuation for the business. Let’s explore some of the advantages of an IPO.
Capital is King in the world of business, and yet it often comes with strings attached. From obligations to private investors to the necessity to pay back debt, raising capital comes with its costs. However, an IPO opens the floodgates to raising capital via the public, which often raises a large amount of funds with significantly fewer strings attached.
On the topic of debt, IPOs are sometimes used by businesses to reduce or retire debt. This allows the business to tackle interest rates alongside improving cash flow across the company.
Going public will often thrust a business into the public eye, aiding perceptions around the stability and value of the business itself. For some businesses, an IPO can help forge new relationships, alongside breeding trust with existing clientele.
For some, an IPO can signal a strategic exit for the existing owners of the business. With the new-found liquidity of the business, founders can sell their shares during an IPO, ending their stake in the company in the process.
So, we’ve covered some of the pros of an IPO. What are some disadvantages?
As an IPO means that a company is giving away a percentage of its equity (by issuing shares), and therefore ownership, this inevitably means a loss/change in control (which is common when obtaining investment). There may also be additional pressure on the management team, by virtue of being listed, to perform for a short-term financial return for the shareholders (so this is an important consideration in relation to a company’s strategy).
By being listed there is a higher level of scrutiny on the company as well as disclosure and reporting requirements.
Both listing a company and maintaining a company’s listing incurs costs which an unlimited company is not required to incur - therefore these should be carefully considered along with all of the positives and negatives before deciding whether to proceed with a listing.
An IPO can be an intensive process, spanning across financial audits, due diligence, and a long legal to-do list. What are some of the key steps you should be aware of? Below we tackle the IPO process in five key steps.
Your initial public offering will require a team of experts to help you float with ease. Here, you might consider enlisting the support of a broker or ‘bookrunner’ who will help to secure investors for launch, an investment bank that may fulfil several roles depending on the nature of the IPO, a legal team with corporate expertise, a financial expert, an investor relations/PR specialist and a market expert who’s been through what you’re about to face.
To get the business ready for an initial public offering, you’ll have a few kinks to iron out. From tax implications to the composition of your board, you’ll need to address a series of things to get your house in order for an IPO.
The listing requirements and listing application process should be carefully considered in advance. This is something that the legal team will be able to advise on.
Up next, due diligence and verification...
Due diligence is an investigation into the company (including business, financial, legal and risk) and this information will be put together and included in the “Prospectus” which enables investors to make an informed decision.
Here, you’ll want to prepare by:
Verification is the process of reviewing the statements of fact in the Prospectus and key documents ultimately for the protection of the company and its directors (and is usually carried up by the company’s lawyers).
When your company has floated, you’re going to want to shout about this from the rooftops. But there are certain rules that need to be followed when it comes to talking about a listed company’s activities, forecasts and objectives. It’s therefore likely that at this stage the company will have either an in-house PR function or, more likely, a specialist investor relations/PR agency that is used to draft press releases for listed companies. It’s also likely that the company’s in-house legal team will have a say on the content of any publications or press releases.
The process of listing a company’s shares is complex and may be even more complex where the company is regulated, for example, a company regulated by the FCA. Assuming the company’s shares will be listed on a UK market (as there are different rules in different countries), the process starts with agreeing the structure for the IPO which will depend on various factors, including current market conditions and the types of investors that are likely to be attracted to the company.
Once the structure of the IPO has been agreed, then the next step will be to prepare an admission document (if the company is listing on AIM ) or prospectus (if the company is listing on the LSA). If a prospectus is required, it will need to be approved by the FCA (the financial conduct authority) and may go through various approval stages before being finalised.
Before the IPO takes place, there will be a preliminary announcement of the company’s intention to float which will set out information about the company and its prospects. This is intended to drum up interest from investors and will be followed by a series of ‘roadshows’ where the members of the senior management team will attempt to secure investment from key strategic investors.
If the company isn’t already a public company, it will need to re-register as one before the IPO takes place so its shares can be offered to the public.
Finally, once the brokers have a clear idea of investor appetite, the board will finally agree the ‘placing price’ for the company’s shares and a final admission document or prospectus will be published before the IPO begins. Champagne will usually be involved.
There will be a broad range of factors that will influence your decision to go for an initial public offering, from the performance of the market to the valuation of your own company. In recent years, there has been a trend of companies waiting longer periods before embracing an IPO. For some, it will be easier to raise equity via private channels, and for others, going public comes with a regulatory burden that just isn’t worth it - yet. In fact, search engine behemoth Google waited just under 6 years to go public, while Facebook held out for a full 8 years before floating on the stock exchange.
So, how do you decide when it’s the right time for you? It helps to ask a number of questions:
Timing is of the essence when it comes to going public, and your company will need to meet a series of set criteria to be firstly eligible for an IPO, and secondly, to maximise the value of its initial public offering.
As a basic, you’ll want to ensure your business has a successful track record that reflects a robust financial history and a promising financial future. You’ll also want to have strong governance procedures in place, an experienced and reliable management team, and an attractive roadmap that piques investor interest.
More specifically, you’ll need to submit three years of financial information on the business to the FCA, meaning if your business is less than three years old, it’s unlikely you’ll meet the criteria for an IPO. You’ll also need to submit further information to the FCA, from contact details of key members of the business to key documents to a capital report on the business.
The costs of an IPO can range wildly and will often be determined by the value of your business itself. According to PWC however, you can expect the cost to range between 3.5% to 7% of gross IPO proceeds.
An IPO may be a couple of years in the planning but will typically take six months to complete once the process has started. If a company’s shares will be listed on the Alternative Investment Market (AIM), this time period can be shorter.
As corporate law experts, we’ve guided companies from idea to exit - inclusive of the ins and outs of an IPO. We support with a whole host of IPO needs including:
Are you ready to embark on an initial public offering? Discover how we can get your affairs in order for an upcoming IPO.