Going public isn’t just for large corporations. Small- and medium-sized businesses (SMBs) can also benefit from an initial public offering (IPO). From raising the capital you need to fund your business growth to increasing the market value of your company, an IPO can set your business up for the next generation of success.
In 2015, for example, businesses raised US$195.5 billion through IPOs, with Asia-Pacific leading the world in global funds raised (46 per cent).
However, going public is a major decision that will change how your business operates at a fundamental level. It also comes with significant expenses, and you’ll need to commit to a time-consuming planning process to make it work.
What is an IPO?
An IPO refers to the first sale of an ownership stake in your private company to public shareholders. With the help of an underwriting firm, your business is essentially split into securities (or stock), which can then be sold to and publicly traded by your shareholders on the stock exchange.
The performance of your business – along with other economic conditions – will affect whether your share price rises or falls over time and how much it is ultimately worth.
Is an IPO right for your business?
Most SMBs use an IPO to raise capital to finance growth, so your company needs to be in a strong growth position before going public. That means an IPO is not a quick fix for financial difficulties and should not be used to get your business out of financial trouble. Rather, think of it as a result of your positive past performance and as a means of achieving the next level of growth.
An IPO also requires significant time and financial investment and should be considered as part of your overall growth strategy. And you need to think about your exit strategy. While a successful IPO can dramatically increase the value of your business, alternative exit strategies such as selling your business privately or passing it onto the next generation of your family are less expensive and may be a better fit for your business.
What are the advantages of an IPO?
First and foremost, a successful IPO offers a significant capital injection to finance the growth of your business, launch new products, enter new markets, expand your team, or invest in research and development.
Following your successful IPO, you’ll also continue to have access to capital markets and – depending on how your business performs on the stock market – you may be able to issue new shares to raise secondary funds when needed.
A successful IPO is also likely to increase the market value of your company, and any family-owned shares can be sold on the stock market as part of your exit strategy.
Running a public company also gives you greater recruitment and retention power by sweetening employee compensation packages with stock options in the company. And since shareholder employees have a direct financial interest in the performance of your company, their productivity is also likely to experience a boost.
What are the disadvantages of an IPO?
An IPO is an expensive process and comes with ongoing costs associated with public reporting and compliance responsibilities.
You’ll also no longer be the lone decision-maker, but rather answer to your shareholders and board of directors, which comes with a loss of control many SMB owners find challenging.
And you’ll be working under pressure to meet investor expectations – all of whom will want you to deliver strong dividends while keeping your share price high. That also comes with the need to commit to regular, open communication and maintain transparency with your investors.
Public companies must also disclose more information about their operations than privately owned businesses, and may therefore become vulnerable to takeovers from hostile competitors.
How do you plan for an IPO?
You’ll need to start planning for an IPO at least two years before going public. It’s important to remember that becoming a public company will change the way your company operates, and you’ll need time to transition to a new organisational structure well before your business hits the stock market.
First, you’ll need to assess your current management team for the skill sets required by a public company. Investors will want to see a knowledgeable and trustworthy management team, which should include a chief financial officer with experience in a public company along with independent board members who can help steer the direction of the company.
With the right management team in place, it’s time to turn your focus to creating best-practice financial projections that your underwriters will use to determine the value of your stock price. It’s vital to keep these realistic and measure your performance against projections throughout the two-year planning process to demonstrate that your numbers are sound and achievable.
You’ll also need to reassess or establish a set of corporate governance principles that determine how your board is structured and compensated, and a code of conduct you expect your employees and directors to adhere to.
To give your IPO the best chance of success, it’s a good idea to allocate some time and resources to a public relations campaign designed to create a positive public image around your company to increase your profile in the market and build investor confidence.
Finally, you’ll need to implement a process for having your financial statements regularly audited and resolve any issues that arise, well before your IPO.
Going public can transform your SMB from a minor player into a major market force. While it’s certainly not a shortcut to success, if you are prepared to commit to a lengthy planning process and willing to make the necessary financial investments, an IPO can set you up for years of success that may otherwise be out of your reach.