Companies tend to think of an IPO as an event: a date, a bell, a share price. In reality the listing is the end of a long preparation, and most of the decisions that determine whether it succeeds are made a year or more before anyone drafts a prospectus.
Our partners and directors have taken companies to market, and the ones that list smoothly have one thing in common: they started behaving like a listed company well before they became one. Here is what has to be true.
1. Accounts that can stand scrutiny
Almost every exchange requires audited historical financial statements, usually for two or three years, prepared under an accepted accounting framework such as IFRS or US GAAP. If the company’s accounts are unaudited, prepared under local rules only, or produced by a finance function that closes the month slowly, this is the longest lead item in the whole process.
Investors and exchanges will also want to see management accounts, forecasts and working capital analysis. A finance team that can produce reliable monthly numbers quickly is a prerequisite, not a nice-to-have.
2. A clean corporate structure
Groups built up over years often have dormant subsidiaries, intercompany loans, shareholders’ agreements with special rights, options granted informally and assets held in the wrong entity. Each of these has to be tidied up before listing, because each will be found in due diligence.
The usual steps include simplifying the group, creating a single top company to list, converting or cancelling special share classes, and documenting every option and warrant properly.
3. A board fit for a public company
Listed companies are expected to have a board that can oversee management, not just a group of founders. That typically means independent non-executive directors, a chair who is not the chief executive, and committees for audit, remuneration and nominations. Requirements and expectations differ by market, but investors everywhere look at the board.
Good non-executives take time to find. Appointing them early also lets them get to know the business before they have to put their names to a prospectus.
4. Governance and controls that already work
Public companies must report accurately and on time, disclose price-sensitive information promptly and manage conflicts of interest. The systems that make that possible, from financial controls to a disclosure policy to a share dealing code, should be running before listing, not written in the final month.
5. An equity story investors can repeat
Investors buy a story backed by numbers: what the company does, why it wins, how big the opportunity is, and what the money raised will achieve. The story needs to be simple enough for an analyst to repeat in a sentence and robust enough to survive due diligence.
If the IPO proceeds will be used to repay debt, that needs to be framed as a strength rather than a rescue. We look at that in taking a company public to clear debt.
6. The right market
Listing venues differ widely in their entry requirements, costs, investor base and ongoing obligations. A growth market with lighter rules may suit a younger company. A main market may suit a larger, established business seeking a broad institutional shareholder base. Some companies list outside their home country to reach specialist investors. We compare the options in choosing where to list.
7. The adviser team
A listing needs a team: typically a sponsor, nominated adviser or equivalent depending on the market, a broker, lawyers for the company and the advisers, reporting accountants, and financial PR. Choosing them early, and choosing people who know the chosen market, saves time and money.
8. A realistic timetable and budget
Listing costs include adviser fees, exchange fees, the cost of the audit and legal clean-up, and the ongoing cost of being public. The timetable is usually driven by the slowest item, which is almost always the accounts. Building both honestly at the start avoids the most common reason IPOs stall: running out of time or money before the finish line.
A simple readiness test
- Do we have audited accounts to the standard the target exchange requires?
- Is the group structure simple and fully documented?
- Do we have, or can we recruit, independent directors?
- Can we report monthly numbers accurately within a couple of weeks?
- Can we explain the business and the use of proceeds in one paragraph?
- Do we know which market we are aiming for, and why?
If several answers are no, the company is not unready for an IPO. It is at the start of the process, which is exactly when the work should begin.
Before the listing: bridging capital
Preparing for a listing costs money before the listing raises any. Many companies fund that period with a bond, loan notes or convertible notes that convert at the IPO. See convertible loan notes explained for how that route works.
Mark Johnson is a Director of BDM Wealth Management, which introduces capital raising opportunities across bonds, loan notes, IPOs and SEIS/EIS. To discuss a raise, get in touch.
BDM Wealth Management is an introduction business and is not regulated. This article is general information, not financial, tax or legal advice, and does not constitute an offer or invitation to invest. Capital is at risk and you may get back less than you invest. Tax treatment depends on individual circumstances and may change. For high-net-worth and sophisticated investors only. Take independent professional advice before making any investment decision.