The motivations for an IPO may vary, and becoming a public company is sometimes not the only option for achieving your objectives. Accessing capital or achieving an exit can be achieved through other channels, such as private capital, debt financing or private sale. In some instances, a parallel strategy of preparing for an IPO while also pursuing alternative channels is the best path.
Even when you’ve decided to pursue an IPO, there are still many key decisions to make, including the structure of the transaction, the geography for the listing and the exchange you’re planning to list on.
Does going public align with or support your strategic objectives?
Are you ready to meet the ongoing public disclosure obligations of a public company?
Have you decided which exchange, in which country, is best for your company?
Do you understand the time and costs involved in an IPO and operating as a public company?
Does your company have highly visible products and services that will be attractive to investors?
A public offering can provide capital to grow and present opportunities that may have previously been limited with existing funding. It can also provide liquidity to existing shareholders and the chance to increase wealth through the sale of shares. As a public company, shares and various stock option plans can also help you attract and retain key talent.
Going public increases financial flexibility, as funds can be used for acquisitions or to pay down debt. The value of a public company also tends to be higher because of increased liquidity, availability of information and comparability to peers.
The initial costs of going public can be high. There are also ongoing costs, including those related to shareholder and regulatory compliance, internal controls, continuous disclosure requirements, as well as audit and legal matters. Public companies are subject to scrutiny by regulators and the investing public, which requires ongoing certifications by the chief executive and chief financial officers. Once public, companies need to publish financial reports and presentations every quarter. They also need to communicate long-term goals to reduce the emphasis on short-term results, which can negatively affect share price.
The process of going public can be lengthy and costly, but the potential rewards make it worthwhile for many organizations. In our experience, companies tend to underestimate the costs of going public, which can include legal fees, underwriting fees, audit and accounting fees as well as the execution of the IPO filing process.
Once public, you will also incur ongoing costs in order to comply with being a public company. A realistic expectation of these costs can help improve budgeting, limit surprises and ensure alignment of the management team, board of directors and other key stakeholders.
The transition to a public company can limit some of the options founders enjoyed as a private entity. For example, external economic factors and fluctuations in the stock market are out of their control but can affect the value of the company.
Company leaders usually start to think about going public when the funding required to meet the demands of the business begins to exceed their ability to raise additional capital through other channels on attractive terms. But simply needing capital doesn’t mean that going public is the right answer. Many company leaders underestimate the time and complexity involved in transforming a private business into a public company. If not done well, there can be a detrimental impact both on the success of the initial IPO as well as the ongoing ability of the company to meet investor expectations.
There are several considerations when evaluating an IPO as a strategy. Do you understand the IPO process? Does management have prior IPO experience? Think about your key objectives for the IPO, such as expansion, liquidity, reputation and employee compensation. Also, consider which assets you’re floating, which market is most suited to your business, where you’ll list and if there are any separation issues, as well as the needs and expectations of current and future stakeholders.