A public listing is usually discussed as a way to raise growth capital. It is also, for the right business, a way to deal with a balance sheet that has stopped working — and that is a different exercise with different preconditions.
This is what it involves, and when it is the wrong answer.
The situation it addresses
A company trades profitably at the operating line but carries debt raised in different conditions. Servicing it consumes the cash that would otherwise fund growth. Refinancing means replacing one obligation with another, often on worse terms, because the lender can see the position.
Listing changes the instrument rather than the amount. Permanent capital with no coupon and no repayment date replaces debt that has both. The business stops paying to stand still.
What has to be true first
The underlying business has to work. A listing solves a capital structure problem. It does not solve a trading problem, and the diligence will find the difference.
The debt has to be quantified and agreed. Every instrument, every maturity, every security interest, reconciled. Debt discovered during diligence is worth several times its face value in damage.
Existing lenders need to be in the conversation. A listing that repays them is usually something they will support. One that subordinates them is not, and they generally have contractual means to say so.
The governance has to exist before the listing, not after. Board composition, reporting, controls, audit. Retrofitting these while public is unpleasant and visible.
Choosing the venue
Venue is a decision, not a formality. Free float requirements, reporting obligations, index eligibility, the investor base that actually trades there, and the ongoing cost of being listed all differ.
A smaller market with a light reporting regime looks cheaper and can leave a company with a listing nobody trades — which delivers the disclosure burden without the liquidity that justified it.
What it costs
Dilution, first. Existing shareholders own less of a business with a cleaner balance sheet. Whether that is a good trade depends on what the debt was costing.
Then disclosure. Results on a timetable, material events announced, a share price that reacts to both. Founders who treat a listing as a funding event rather than an operating change tend to find the first year difficult.
Then the ongoing cost of being public, which is a permanent line in the accounts rather than a transaction fee.
When it is the wrong answer
When the debt is a symptom rather than the problem. A business losing money at the operating line has a trading issue that a listing will expose rather than fix.
When the numbers will not survive scrutiny. Diligence for a listing is more searching than for a private raise, and the consequences of getting it wrong are public and lasting.
When the company is not ready to be governed as a public company. That readiness is cultural as much as procedural, and it is visible to everyone involved well before the listing.
Used properly, a listing is a governance event that happens to raise money. Treated as a fundraise with paperwork attached, it disappoints.
Related reading
- IPO readiness: what has to be true before you list
- Choosing where to list your company
- Refinancing company debt with a bond
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. For high-net-worth and sophisticated investors only. Take independent professional advice before making any investment decision.