Essentially, an IPO means a company sells some of its shares to external shareholders on a regulated stock market while retaining control of the company. This is also known as known “flotation” or “going public”.
Why do companies undertake an IPO?
Companies typically undertake an IPO to raise capital in order to fund organic growth, acquisitive growth, or a combination of the two. An IPO provides a platform to significantly enhance profile and add credibility to a company, its products and services.
An IPO enables companies to raise funding from new investors without compromising the strategic direction of the company. Unlike venture capital funding, there is no dominant external shareholder, but a number of smaller investors which combined may only represent say 25 per cent of the total value share capital. This means that there is no external investor with a controlling percentage.
Most companies undertake some repeat fundraising in the years following the IPO. For those companies with acquisition strategies, repeat fundraisings enable them to capitalise on opportunities as they arise without having to go through the full IPO process again.
>See also: Flotation: the pros and cons
What are the different UK stock markets?
- Aquis – for small companies
- AIM – for smaller and medium growing businesses
- The Main Market – for larger companies
How much can you raise in an IPO?
Generally, fundraisings under £3m on Aquis. Fundraisings up to £20m on AIM, and larger fundraisings on the Main Market.
How much does going public cost?
The costs will be linked to the amount of funding raised, so for example, the costs of an IPO that raises £5m will be considerably less than one that raises £50m.
An IPO can cost approximately 8 per cent of the amount your company raises. However, most of the costs will be contingent on success and the majority of the costs taken out of the funding a company raises.
>See also: How to float on AIM
Who is involved in a company IPO?
Nominated adviser (AIM), Aquis Advisor (Aquis) or sponsor (Main Market) ensure a company complies with the regulatory requirements.
Undertakes fundraising activities
Responsible for detailed financial reporting
Performs due diligence and oversees the listing from a legal perspective
Manages the register of shareholders
Financial PR firm
Helps craft the investment case for an investor audience.
How to IPO a company
First, prepare a business plan and consider how the funding will be allocated and the impact on the company. It’s useful to undertake a feasibility study to consider the pros and cons for the company’s particular circumstances. Specialist flotation consultants will be able to undertake this preparatory work.
Pull together all the documentation that will be required in the IPO process. For example, contract documents, biographies of Directors, lease agreements, IP etc. If possible, these documents should be kept in an online data room.
To move forward with the flotation, engage in dialogue with potential advisors/brokers. Having engaged advisors and a corporate broker, work will commence on the admission documentation. An early notification document may be sent to the regulatory department at the chosen stock market to ensure there are no red flags.
On completion of the admission documentation, it will be submitted to the stock market of choice for approval. In the meantime, the corporate broker will develop the investment case and build a book of potential investors. The chosen stock market may seek clarity on certain areas of the documentation, and it is common for some re-submissions until finally agreed.
The final price and number of shares to be sold will involve the company, its key advisors, and corporate broker. Generally, companies put at least 25 per cent of their share capital on the stock market. This is known as “free float”, which means shares are not controlled by anyone who works directly in the company or is connected with them (such as family members).
The admission document or prospectus will detail information about the business, including risks which might affect the company.
The document will include the following information:
- Target market
- Competitive landscape
- Management team
- Company financials
- Who is selling shares in the offering
- Number of shares to be issue
- Expected price range
- Potential risks
Finally, the company is listed on a stock market and funds are deposited in the company’s account from the sale of shares.
Pro tip: The initial share price (IPO price) may differ from the price it starts trading. The IPO price is set ahead of the IPO and is the price investors participating at the time of the IPO will pay per share. To attract investors, this is typically slightly lower than what the analysts pricing the company think the shares will go for post listing.
At what stage should a company IPO?
For entry to Aquis, the minimum value of the company needs to be £2m. For AIM, generally companies that are generating at least £1m pre-tax profit. For entry to the Main Market companies need to have a value of at least £30m or higher.
How long does it take to go public?
The IPO processes itself can take between 12-20 weeks; however the feasibility and planning stage can take a number of weeks in advance of this.
What are the disadvantages of an IPO?
Financial reporting – public companies disclose information to the market and to investors. This involves periodic financial reporting.
Performance pressure – A company will have set out its financial forecast at the time of the IPO. These forecasts will be expected to be met and failure may result in a negative impact on a company’s share price. It’s therefore best practise to “under promise and over deliver” on forecasts.
John Holland is managing director of company flotation consultants Holland Bendalow