Essentially, an IPO means that a company sells some of its shares to outside shareholders on a regulated stock market while retaining control of the company. It is also known as “floatation” or “going public”.
Why do companies bring IPO?
Companies typically conduct IPOs to raise capital for organic growth, acquisition growth, or a combination of both. An IPO provides a platform to significantly raise the profile and add credibility to the company, its products and services.
An IPO enables companies to raise funds from new investors without compromising the strategic direction of the company. Unlike venture capital funding, there is no major outside shareholder, but a number of smaller investors who may jointly represent only 25 percent of the total value share capital. This means that there is no outside investor with a controlling percentage.
Most companies do some repeated fundraising in the years following their IPO. For those companies with acquisition strategies, frequent fundraising enables them to capitalize on opportunities as they arise without having to go through the full IPO process again.
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What are the different UK stock exchanges?
- Aquis – for small companies
- AIM – For small and medium growing businesses
- Main market – for large companies
How much can you raise in an IPO?
Typically, fundraising on Equis is under £3m. Fundraising up to £20m on AIM, and larger fundraising on the main market.
How much does it cost to go public?
The costs will be linked to the amount of money raised, so for example, an IPO raising £5m will cost much less than an IPO raising £50m.
About 8 per cent of the amount raised by your company can be spent on an IPO. However, most of the costs will be dependent on success and most of the costs are covered by the funding raised by the company.
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Who participates in the IPO of the company?
Enrolled Advisors (AIM), Equis Advisors (Equis) or Sponsors (Main Markets) ensure that the company complies with regulatory requirements.
conducts fundraising activities
Responsible for detailed financial reporting
Performs due diligence and oversees listings from a legal perspective
Manages the register of shareholders
financial pr firm
Investor helps prepare the investment case for the audience.
How to IPO a company
First, draw up a business plan and consider how the funds will be allocated and what will be the impact on the company. It is useful to conduct a feasibility study to consider the pros and cons for a company’s particular circumstances. Specialist flotation consultants will be able to undertake this preliminary work.
Pull together all the documents required in the IPO process. For example, contract documents, biographies of directors, lease agreements, IP etc. If possible these documents should be housed in an online data room.
To move ahead with flotation, engage in dialogue with potential advisors/brokers. After appointing advisors and a corporate broker, work on entry documentation will begin. A preliminary notification document may be sent to the regulatory department in the selected stock exchange to ensure that there are no red flags.
On completion of the Admission Document, it will be submitted to the stock exchange of choice for approval. Meanwhile, the corporate broker will develop the investment case and build up a book of potential investors. The selected stock market may seek clarity on certain areas of the documentation, and it is normal for some re-submissions to be made until finally agreed upon.
The final price and number of shares to be sold will be determined by the company, its lead advisors and the corporate broker. Usually companies invest at least 25 per cent of their share capital in the stock market. This is known as “free float”, which means that the shares are not controlled by anyone who works for or is directly involved with the company (such as a family member).
The entry document or prospectus will detail the business, including risks that may affect the company.
The document will include the following information:
- target market
- competitive landscape
- management team
- company financial
- Who is selling the shares in the offering
- Number of shares to be issued
- expected price range
- potential risks
Finally, the company is listed on the stock market and the sale of shares is credited to the company’s account.
Pro Tip: The initial share price (IPO price) may be different from the price that starts trading. The IPO price is determined prior to the IPO and will be paid per share by participating investors at the time of the IPO. In order to attract investors, it is usually a little less than what analysts think the company will be valued at if the shares go after listing.
At what stage should a company’s IPO happen?
To enter Aquis, a company must be valued at a minimum of £2m. For AIM, generally companies that are generating at least £1m pre-tax profit. Companies must be valued at least £30m or more to enter the main market.
How long does it take to go public?
The IPO process itself can take 12-20 weeks; However, it may take several weeks before that in the feasibility and planning phase.
What are the disadvantages of IPO?
provide financial information Public companies disclose information to the market and investors. This includes periodic financial reporting.
performance pressure – At the time of IPO a company will have set its financial forecast. These forecasts will be expected to materialize and failure could result in a negative impact on the company’s share price. So it’s a best practice to “under promise and over deliver” on forecasts.
John Holland is the Managing Director of the company Flotation Consultants Holland Bendalo
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