Sam Adebiyi discusses how it is important to consider both the advantages and disadvantages of an IPO before pursuing a flotation.
Are initial public offerings (IPOs) becoming an endangered species? Just 25 companies floated on the London Stock Exchange during the first eight months of the year – that’s compared to 87 in 2018 and 106 in 2017. To some extent, the decline reflects Brexit uncertainty, but IPO numbers were falling even before the referendum of 2016.
Instead, more companies are raising money through the private market, with private equity investors now competing hard to back the best businesses. Many companies – and certainly those in the lower or mid-market – do not even consider the public market for fundraising or an exit.
If you are looking ahead to an exit, there truly isn’t a right or wrong way to sell an equity stake in your business. An IPO has benefits and drawbacks compared to other types of exit – the right option will depend on your goals, both personal and commercial, and the individual circumstances of your business.
The pros of an IPO…
On the plus side, an IPO is an excellent way to provide shareholders and employees with liquidity: once listed, your business’s shares will be publicly traded on a daily basis on an open market and transparently priced.
There are benefits for all. An IPO will potentially raise a substantial chunk of cash for the business, providing invaluable funding to support further growth; it may also be possible to use your stock to underpin acquisitions, accelerating your growth trajectory. For staff, having an element of equity in their remuneration is often highly prized; this can be a smart way to attract, motivate and retain key employees, including senior managers. For investors, the share price provides a constant indication of how the business is performing.
Nor should you undervalue the potential lift to your brand that an IPO can secure. The flotation process itself will raise the profile of the business, and publicly-traded companies attract ongoing attention from investors, analysts and the media. That can provide some fantastic market positioning.
…and the cons
Against these upsides, consider the more negative aspects of an IPO. These start with the process of a public flotation itself, which can be expensive, time-consuming and uncertain.
The complexities of getting the IPO away will definitely take up a very significant proportion of management’s time, distracting them from the day-to-day running of the business. The process will require significant support from third party advisers such as bankers, brokers, lawyers, with the costs adding up. And there is no guarantee of a successful outcome: the market may not support your IPO, particularly during challenging periods. Execution risk is high.
Moreover, even after a successful IPO, there are further challenges to consider. Public companies face significant regulatory requirements, putting a significant compliance burden on the business. You must accept there will be greater public scrutiny of the business and confront the need to be more transparent. And this transparency can be demanding: the pressure is on to constantly deliver results that stand up to that scrutiny.
Indeed, managing the expectations of shareholders – and the broader market – will take up increasing amounts of the business’s time. And all publicly listed companies know they are, to some extent, hostages to fortune – their share prices can take a tumble through no fault of their own, particularly during periods of market volatility.
Consider your options
In practice, there is no one-size-fits-all framework for weighing up the pros and cons of an IPO. Every business is different: inevitably, the upsides of a public market flotation will sway some companies, while others will feel the downsides are too onerous for them. A lot will depend on the type of business and the dynamics of the senior team.
The good news is that the strength of the private funding markets right now means there are attractive alternatives for those businesses that decide an IPO is not for them. Private equity investors may prove a much better fit, particularly for businesses that haven’t raised money before, and those that have picked up funding in the past, but which are now seeking further support. Private equity backing can also be a stepping stone to get you towards an eventual flotation, with investors supporting you through an eventual plan to IPO.
We are always interested to meet with business owners and managers thinking about selling or buying a business – if this is you, we would love to talk! Please get in touch on email@example.com to arrange a meeting.