According to EY, UK stock market listings in the first three quarters are the highest they’ve been in 20 years, with 14 IPOs raising £2.9bn on the main market and 19 IPOs raising £1.1bn on Alternative Investment Market (AIM). While an IPO is a notable objective for businesses, with a lot of potential benefits, some risks and considerations come with going public.
Risks Of Going Public
Not articulating your Equity Story Properly
An equity story is the cornerstone of a successful IPO, so it’s crucial that it’s articulated well. Equity stories help share a business’ vision while offering compelling reasons why investors should buy stocks. Companies only get one chance to tell their story, and if they get this wrong, they risk being incorrectly valued and investors not understanding the business.
So what elements must be included to construct a powerful equity story? While there is no one-size-fits-all approach, and every business has its own authentic message, a number of components make up a compelling equity story. Firstly, investors should be able to see profit, growth and return clearly. It’s crucial that they understand the business, its purpose, its key drivers, and its plans to capitalise on future opportunities. When drafting an equity story, consider the three Cs. Is it Clear? Is it Concise?, and is it Compelling? Finally, it’s important not to overpromise. Post-IPO, investors will hold businesses accountable for delivering against those future opportunities in full, and even beyond in some cases.
Companies must have good visibility of costs before going public. An IPO process isn’t cheap. While the cost of going public varies depending on company size, offering proceeds and company readiness, businesses will likely still have to fork out millions across underwriting fees, legal fees, auditor fees and other transaction costs.
As well as the costs of going public, Board members must consider the additional costs usually incurred once they are a public company. A survey of CFOs, carried out by PWC found that the incremental costs of being public are broadly split across five areas: incremental audit, public/investor relations, financial reporting, legal and regulatory compliance.
Timing & Resources
CFOs cannot manage an IPO by themselves, so it’s important that organisations have a well-staffed finance department supporting them. An IPO puts an immense strain on finance teams, with high workloads and strict deadlines accompanying it. If they’re not prepared for this, they run the risk of juggling too many tasks and making mistakes. These errors could seriously impact the company’s valuation or disrupt the ‘business as usual’ activity.
As explained in Protiviti’s Guide to Public Company Transformation, “The failure to fully develop sound business processes, controls and infrastructure, particularly those that support financial reporting processes, is one of the most common mistakes companies make in their public company readiness effort.”
Benefits Of Going Public
Access to Capital
One of the most appealing reasons for going public is the substantial amounts of capital that can be raised. Many businesses find it expensive and dilutive to raise equity from venture capitalists and other big investors. However, equity investments from the public can help businesses to gain the capital it needs to deliver their vision. This capital can then be invested back into the company, allowing it to grow and innovate. IPOs have helped corporations fund research, develop new products, increase marketing efforts and reduce debt.
Going public also gives businesses great exposure. As soon as a company announces its IPO, it receives a lot of publicity and media coverage. This public awareness could not only result in more investors, but it could also bring in more suppliers, customers and even future leadership candidates. As Investopedia shares, “A publicly-traded company conveys a positive image (if the business goes well) and attracts high-quality personnel at all levels, including senior management.”
A listed business has effectively been sold to the general public. People are putting money behind it and believe in its potential. This validation can have a substantial effect on businesses earlier in their journey or companies going through a transformation or releasing new products.
The decision to go public should not be rushed. While there are some exciting benefits for a growing company, the challenges and risks associated with going public could be too demanding if the timing is not considered. It is the responsibility of Board members to evaluate the company’s readiness for an effective transition. This decision should not be taken lightly.
About the author: Imran Anwar, Chief Financial Officer at Epos Now has 15+ years of cross-industry experience in maximising sustainable company growth, raising capital, initial public offerings (IPO) and strategic business transformation.
Prior to joining Epos Now, Imran served as Deputy Group CFO at The Hut Group (THG PLC). During this time, he built out the finance, governance and risk infrastructure to drive the company through a successful IPO on the London Stock Market, the largest UK initial public offering for 3 years.