An initial public offering, or IPO, is the first sale of stock issued by a company to the public. Going public can raise a great deal of money, but also requires greater transparency of financial information.
An IPO is the sale of shares in a company to institutional and larger investors and, sometimes, the general public.
Prior to an IPO the company is considered private. A privately held company has some benefits that are forfeited once it goes public. For example, owners of private companies do not have to disclose as much financial information about the business.
While some very large companies choose to remain private, many are listed on the stock market. Going public raises a great deal of money for any business for it to grow, and to pay back early investors.
The process of listing is time-consuming and involves a range of advisers, but it is an opportunity for a company to critically examine itself.
The decision to launch an IPO, or flotation, must be based on a realistic assessment of the business, its management, where it is in the stage of its development and its prospects.
When a business reaches a certain point, it may require significant investment to make a step change. This may involve applying for a public listing of its shares.
A listing may be used to raise money to:
- finance growth opportunities;
- finance acquisitions;
- rebalance the balance sheet;
- broaden the company’s shareholder base; or
- provide liquidity at listing or when it comes to trading shares in the company.
In addition, a public listing will increase the profile of the company with a wide range of stakeholders, including customers, suppliers and peers, and allow it to incentivise key employees through share-option plans more easily.
If your business has a trading track record and further growth plans, it would be in a position to raise equity capital through an IPO.
A proportion of its shares would then be listed on a stock exchange and traded in the secondary market.
The run-up to a company seeking a listing can be broadly divided into two phases – pre-IPO preparation and the IPO process itself. Key tasks in the preparation phase, includes:
- a critical review of a company’s business plan and growth prospects,
- assessing the management team,
- appointing an appropriate board,
- tightening internal controls,
- improving operational efficiency, and
- resolving issues that may adversely affect the listing early on.
The management team need to be able to explain the business, its strategy and prospects clearly to investors, and demonstrate knowledge of the market as well as its challenges.
- A comprehensive business plan will be needed, which will set out the products, markets, competitive environment, strategy, capabilities and growth objectives.
- The company’s financial performance should preferably be one of consistent top- and bottom-line growth, with a sound balance sheet post-IPO.
- A financial model should demonstrate clearly the company’s growth prospects and associated risks to give investors confidence.
- If the company is raising new capital, the use of proceeds should be clearly articulated and in line with strategy.
- Proper financial controls need to be in place.
- A publicly-listed company needs to articulate clearly its corporate governance arrangements to demonstrate it has a board capable of running a public company.
The IPO is a step in a company’s growth cycle and the start of its life as a public company, which will make certain ongoing demands on the business.
Financial statements must be produced and corporate governance codes adopted to provide a framework for long-term engagement with shareholders.
Once on market, the company will have access to further equity capital, through a further issue or placing, if it needs additional finance on its journey.
Finance at every stage
Business financing is not a one-off decision, but an ongoing and evolving situation. No decision can be made in isolation to the businesses journey. Find out more about what options are suitable now and what might work at another stage.
- Access to funding: why your equity story matters.
- What does the advisory function bring to equity investment?
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