The benefits of an IPO (stock market flotation) for a company are numerous. They include the ability to raise millions of pounds and also elevate the profile of a company significantly.
Why companies IPO
It could be that they need capital to grow their business. For smaller companies this may be less than £2m and for larger companies this may be excess of £200m. The UK is home to some of the most respected stock markets anywhere in the world, enabling companies to have their shares traded and raise money since the 1600s. Underpinning this is the deep pool of investment capital in London ready to invest in companies.
>See also: Flotation: the pros and cons
5 benefits of an IPO for a company
For company founders, the benefits of an IPO could include an opportunity to realise some of the “sweat equity” put in to building a company. Or, for those with angel investors and venture-capital backers the chance to realise their own investments through an exit or partial exit.
Other benefits of an IPO include incentivising staff by offering shares at a beneficial price, improving a company’s credit rating, and, enhancing a company’s profile.
#1 – Long-term and repeat fundraisings
For most companies it’s relatively straightforward to raise additional funding once floated, as there’s no requirement to go through the full flotation process again.
#2 – Retain control
One of the key distinctions between floating a company and using venture capital is that stock market companies have no dominant external shareholder. This means management retain control of the strategic direction of the company.
It’s generally unrealistic to place less than 20 per cent of a company’s total shares on the market, as this can impact on the liquidity of the company’s shares.
#3 – Increasing brand profile and awareness
For companies with national and international ambitions, a flotation on the London stock markets provides an opportunity to leverage the company’s listed status and grow the corporate brand nationally and even globally.
#4 – Gives staff an incentive
Employee share option schemes help to recruit, incentivise and retain staff.
#5 – Secondary market for shares
This allows existing investors to exit
>See also: What does it mean to IPO a company?
IPO requirements for a company
Each UK stock market is designed to meet the needs of various sizes of companies. Companies should have a minimum valuation of £2m before it’s worthwhile considering.
Depending on the stock market of choice, a business may require financial statements for past three years and latest audited financials must not be more than six months old.
It’s important to consider the amount of funding required by the company in the short and medium term.
Also, it’s a prerequisite to be able to demonstrate sufficient working capital for at least 12 months from the date of flotation.
>See also: How to float on AIM
Cost of a stock market flotation
The costs associated with a stock market flotation vary depending on the amount of funding raised and the stock market chosen. Costs in the region of 8 per cent of the amount raised are common. The majority of the costs will be advisor fees and broker commission on the funding raised. Most costs will be contingent on a successful outcome and companies generally raise additional funding over and above what they require to pay the flotation costs.
IPO risks for companies
Investor sentiment towards a particular business sector may have an impact on the company’s share price (either positive or negative).
Running a public company can be more time-consuming because of reporting responsibilities. Whilst some entrepreneurs may find the reporting initially uncomfortable, companies quickly get to grips with this and retained corporate advisors are on hand to ensure no breaches occur.
The London IPO market has experienced a challenging 2022. The war in Ukraine and economic instability have led to some businesses pausing their flotations until 2023.
Nevertheless, for those companies which are already listed on UK stock markets around £8bn was raised during 2022. In some cases this funding propped up balance sheets. In others, this enabled companies to capitalise on acquisition opportunities that have arisen as a result of downward pressures on corporate valuations.
No guaranteed return
An anticipated valuation may not be achieved at the time of flotation, and therefore it’s useful to undertake a feasibility assessment ahead of the process to reduce this risk.
How long does it take?
The flotation process itself may take between 12-20 weeks but planning and preparation can take a few weeks in advance of the process.
Annual accounts and financial projections will need to stand up to scrutiny and your company will be subject to a due diligence exercise.
How is a company valued?
In most cases, investors will be either experienced stock market investors or institutional investors. The appointed broker will assess the company and benchmark it with others in the same or similar business sectors to come up with a valuation range.
The ability of a company to be able to demonstrate visibility of future earnings is particularly helpful in securing a favourable valuation. However, ultimately the final valuation and share price depends on the demand for the stock.
There is sometimes a degree of short term volatility in a company’s share price in the days immediately following the IPO before it stabilises. The broker will usually look for a steady increase in the share price in the three months following the flotation of at least 10 per cent.
John Holland is managing director of company flotation consultants Holland Bendalow