Listing - the best option?
There are significantly greater rules and regulations that a Listed Company must comply with, compared to a privately owned company, which have both cost and resource implications. There is also a greater requirement for disclosure and communication with investors and the City generally. Bad news and mistakes can be unfairly amplified and have both immediate effect on the share price and longer term impact on the market’s perception of management and the company. Sometimes it may be better to look for alternative sources of funding (eg: private equity) allowing the company to go through development stages in a more private environment.
Resource and skills?
The Initial Public Offering (IPO process) is a potentially lengthy and time consuming one. Don’t let the business suffer by allowing senior and operational management to be distracted from the day to day running of the business. The last thing you need is a downturn in the business just as you’re trying to attract investors.
Ensure internal teams have the necessary resource to deal with the increased demands of financial and legal due diligence; preparation of projections and investor presentations; increased PR activity; preparation and verification of Admission documents; review and development of accounting systems, controls and procedures; increased Corporate Governance and Company Secretarial requirements. Consider taking on board a consultant or Non Executive Director with relevant experience to lead and co-ordinate the internal IPO process. Set up an internal IPO team to manage the IPO process, protecting operational management as far as possible from being distracted from their day to day responsibilities.
Advisers
Key advisers will include a Nominated Advisor (Nomad) as the lead adviser, broker (assuming you are raising money), lawyer, reporting accountant and financial PR company. Choose them carefully depending on their experience and track record of floating companies, their knowledge of your sector, the amount of funding required, how they are likely to gel together as an advisory team. Not just on the basis of cost – this is a classic case of cheapest fee quote can most definitely end up as a false economy.
Communication is Key
There needs to be clear communication amongst the internal team to avoid misunderstandings, matters falling between people, incorrect or incomplete information being passed to the advisers, all of which can add to costs and extend the IPO timetable.
Similarly there needs to be open, frank and transparent communication with the advisers, especially the Nomad. It is not unusual for practices to evolve within a privately owned company that may work and be legitimate as such, but which should not continue in a public company environment. The sooner any concerns are raised with your Nomad, the sooner these can be either put to bed or alternative options considered. Such a concern, raised or discovered at the 11th hour can delay timetables, increase costs, or at worst cause the IPO to be aborted.
Managing Costs
The IPO process is not only time consuming but also expensive. Rule of thumb suggests 10% of funds raised. Costs can be included within the amount of funds to be raised, but there will be some that will have to be paid out before the funds are received. There are also some that will be payable whether or not the IPO is successful and reasons for a failed IPO may well be beyond the company’s control i.e. market conditions. It is therefore imperative that the company has sufficient available cash to deal with these prior to embarking on the IPO process.
Additional support
A good example of outsourcing certain requirements is International Financial Reporting Standards (IFRS) conversion. As a privately owned company it is likely that accounts will have been audited to UK Generally Accepted Accounting Practice (GAAP), including Financial Reporting Standard (FRS) 102. For the IPO, Historical Financial Information will be included in the Admission Document in a Short Form Accountant’s report that will be the subject of a fresh audit opinion and must comply with IFRS. IFRS disclosure requirements are technical and can change from time to time.
Timetable
Agree a clear timetable with the Nomad early on and ensure all key advisers have bought into it. Add to that timetable internal milestones that will also need to be achieved in order for it to be met. Of course there will be factors beyond your or your advisers’ control, but without something to work to, the timetable will drift, leading to delays in completion and fund raising and potentially adding extra costs.
Cash to be raised
Be clear about how much (net of expenses) you want to raise at IPO and how it will be used. Raising too much unnecessarily dilutes current shareholders and may put off investors who don’t want to invest money just to see it sit in a bank account. It is always possible to go back to the market for a second tranche and may even result in a higher valuation assuming milestones promised at the first fund raising have been met.
Attempting to raise too little can call into question the financial viability of the business in the 12 to 18 months following the IPO, which could result in investors declining to participate.
Use of funds will need to be clearly stated at the investor presentations and investors will want to see these are focused on developing and adding value to the business. This will include repayment of company debt, on the grounds that doing so will strengthen the balance sheet and reduce financing costs. However, investors will be reluctant to see anything more than a small proportion of the IPO proceeds, if any at all, going to existing shareholders. A request for such will lead them to question the commitment of those shareholders to the proposed strategy for developing the company and adding shareholder value. Any desire to “take money off the table” must be discussed early on with your Nomad, but a final thought… if what you are looking for is an exit, then an IPO is not the right option for you.
Jack Clipsham is Corporate Finance Partner at Kreston Reeves and
can be reached at
jack.clipsham@krestonreeves.com
Tel: 0330 124 1399
