An initial public offering (IPO) is a way for businesses to raise capital and attract investors. However, is a business IPO the right choice for your organisation? Here’s how to determine if this is the way to go and if company size should be a factor.
What Is a Business IPO?
An initial public offering is the first instance when a privately held company decides to sell its shares to the public. In other words, the business switches from private and allows outside investors to buy its stock.
Usually, only a larger-sized company would partake in a business IPO, but this can depend. The process is often referred to as the business going public. The U.K.’s Financial Conduct Authority (FCA) regulates an organisation’s initial public offering.
Companies that decide an IPO is the right option must prepare. They should ensure they fit the requirements of the FCA and can comply with all the regulations.Usually, businesses seek the help of an investment bank that can aid and advise them on the IPO. At this point, they assemble a team of advisers. While this can differ, the group typically consists of the following members:
- Investment bank
- PR consultants
There are also a few market options available. Here are two of the most common:
- AIM — best for smaller businesses interested in growing the company
- Main Market/London Stock Exchange — for large organisations
The business and its advisers should determine which market makes the most sense for them early on.
Companies that list their shares on AIM need a nomad. This is an adviser that AIM appoints. The organisation might also require a sponsor — the same as a nomad but for the main market — and a broker. However, this can depend on the type of listing and the part the investment bank plays.
Companies considering an IPO must perform adequate research to ensure they’re properly prepared. This will help speed up the process and allow things to go more smoothly.
Factors to Keep in Mind When Considering a Business IPO
One crucial component businesses must know about is the time-consuming IPO process. It can take months and even years before everything is ready.
In addition, it is also a costly procedure. An IPO has many associated expenses, which can stack up fairly quickly, such as the charges involved with your team of advisers. This is an ongoing cost because you will need to retain them.
Another thing to remember is there are strict regulations you must adhere to. After the IPO, you must publicly disclose certain information, such as finances, accounting and taxes.
This is a major downside for many companies. Organisations that go public give up full ownership of their business. This means more stakeholders get involved and the founder can’t control things like before. In this case, efficient stakeholder management is recommended to ensure everyone is on the same page. About 63% of companies have such a plan in place.
Another factor to consider is that there is no guarantee. For this reason, many organisations consider a business IPO a dangerous option. The validation outcome can be much lower than what they may have wanted.
Additionally, the business suffers significant losses if the IPO fails. Going public can pose severe risks, and companies should carefully examine if it is the right option.
How Big Should the Company Be to Go Public?
Companies must consider all the factors of going public. They should examine the pros and cons to identify whether an IPO is worth it.
There are more factors to consider than business size when considering an IPO. Some experts advise paying attention to your organisation’s revenue, while others say it depends on the company’s growth path.
It can also be contingent on the type of listing the business chooses. Organisations that match the minimum requirements of an IPO should not necessarily go public.
An IPO is a big decision and requires careful consideration of whether it is worth it. According to the British Business Bank, a company must have at least 5 million euros in revenue before becoming eligible. This excludes health care organisations, as many of them can apply sooner.
Why Do Companies Go Public?
There are several reasons why companies decide on a business IPO. The main reason is to raise funds, which are usually invested back into the company. The primary intention is to utilise the capital to help the business grow.
Another common reason is to pay off debt. The motive behind why companies consider an IPO differs. Here is a quick summary of why businesses decide to go public:
- To raise funds for growth opportunities
- To increase liquidity
- To use the capital to purchase another organisation
- To get rid of company debt
- To increase brand awareness
- To use it as an exit strategy
Which Is Better, a Public or Private Company?
Whether owning a public or privately held company is better depends on personal preference. It entirely depends on the business objectives and whether switching over makes sense.
Private companies have more privacy, and the founders can run the organisation as they see fit. However, a business IPO enables them to raise significant funds if it is successful. This means the founders give up some control. They must also comply with strict regulations and pay associated costs.
It’s not easy switching from the startup phase to the next step. Businesses should determine whether they are ready for it.
Unfortunately, many organisations struggle to keep their heads above water due to insufficient funds — especially in the beginning. According to research, about 38% of startups fail due to inadequate capital.
Does an IPO Make Sense for Your Business?
Company officials unsure about going public should discuss their plan with an investment bank to know if it is the right choice. Remember to examine the pros and cons to help you determine if it is worth it.