There are few defining moments in business that compare to the heady rush of publicly listing a company. We’ve all seen the headlines: unicorn businesses that reap billions of dollars following their listing on the stock exchange. And with Uber, Airbnb and Pinterest all set to launch their own Initially Public Offerings this year, the hype is only set to heighten.
While an Initial Public Offering (IPO) does have the potential to launch your company into the next stratosphere, it’s never as simple as turning off its privacy settings. As with most things in finance, preparation is always key. From up to 12 months before launching the IPO, extensive groundwork is needed to ensure your company is ready for its entry into public life.
Do you pass the test?
The Australian Stock Exchange requires companies to meet either a profit or asset test before they can even consider pursuing the path of an IPO. For the profit test, a company must have an aggregated profit of $1 million from continuing operations from the past three years, in addition to a consolidated profit of $500,000 in the last 12 months.
The asset test is the more commonly used in Australia and requires the company to have net tangible assets of $4 million and can include property, infrastructure and goods. You can also reach the asset test by achieving $15 million in market capitalisation.
Even though you may be eligible to undertake an IPO, there are other unofficial considerations business owners sometimes overlook, and that includes the additional costs of being listed. Once listed, expect corporate overheads to increase from $400,000 to $600,000 a year to cover the ASX listing fees, registry fees, board and governance fees, not to mention ongoing costs.
It can be done cheaper, but it’s a realistic figure for a small-capped company. Obviously, the larger the company the more substantial the fees. If you can’t avoid the corporate overheads, you should never list. There’s plenty of those companies on the ASX, and often they’re forced to raise more money from the market to cover the operational costs rather than focus on building the business.
The other factor to take into account before embarking on an IPO is the level of distraction it causes business owners. In nearly all cases, it’s preferable for an appropriate person to be appointed to either manage the business or the IPO so that neither is compromised. That way, there’s someone always on hand to answer the advisors’ questions, and someone dedicated to the running of the business. Otherwise, it’s not unusual to experience a drop in revenue, especially in small businesses, as the owner is busy selling the company to the investment market rather than potential customers.
Laying the foundations
Once you’re confident you meet all the requirements to list, you need to be able to demonstrate the company’s ability for growth. A substantial amount of effort will be in developing the prospectus, the document that outlines everything about the business and is usually prepared between your corporate advisors, legal and accounting teams.
Many investors look at the financial information in the prospectus because it’s the black and white data which can drive the success of the business. Financial audits can be made to be complicated, but for an IPO, the goal is to make the reporting as simple as possible, so it’s easy for investors to review the company’s finances and make decisions.
The figures should all be tracking in the right direction, but investors can still be interested in companies that have lower revenues but offer future potential, otherwise known as non-financial growth. The mining sector is one such example because it can indicate its capacity to gain revenue and profitability on the back of promising core samples.
Of course, preparing an IPO can often lead to another form of investment or potential takeover. As the profile of the business is lifted and garners market interest, it makes it ripe for other opportunities. It’s not unusual to be three quarters through the IPO process, only for an acquisition to occur. Investors know all the legwork has been done to meet the strict ASX and ASIC requirements, giving them greater confidence and comfort in their acquisition.
Getting the right advice
The role of a corporate advisor is crucial in the lead-up to an IPO, because they’ll ensure not only your capital structure is set up for success, but essentially perform triage to co-ordinate all the other advisors – from legal to accounting to investor relations – to ensure every aspect of your listing is correct and investor ready.
One of the other essential roles the advisor plays is serving as a chaperone into the investment market. At Moore Stephens, we open up our network, taking our clients on roadshows to introduce them to all manner of investors from private equity, to institutional investors or family offices. What’s vital is not just getting any money in, but the right money to invest in the company. Stockbrokers offer the same service but do not provide the same independence. It means we can walk into any stockbroker and make an introduction not as a competitor, but as the conduit to introduce the business.
Similarly, our networks are important to introduce potential board members to your company. Good governance is critical to the ongoing health of the business, and you should expect your corporate advisor to be able to recruit suitable and expert board members to help steer your company’s next chapter. Often this means also finding members who also share your purpose and vision.
If a company is relatively inexperienced in working with ASX board members or reporting, it’s optimal for the corporate advisor to continue post listing, for a minimum of 12 months. It enables the advisor to be the sounding board for the company, as well as assist in the wording, structure and timing of company announcements. The listing is not the finish line, it’s really the start of the next race.