CapitalQuarter – Autumn 2022
It’s a big decision with pros and cons. But if you decide to go ahead with an IPO, forward planning and clever timing are vital.
An initial public offering (IPO) of a company’s shares on to a public market is a transformational process and a significant development opportunity. What are the specific benefits? An IPO can raise the capital for a key growth phase of a new business. It also generates the publicity and awareness to drive a marketing or sales push.
But an IPO is hard work. It means committing considerable resources and time to prepare the documentation. Early planning and engagement can help to reduce the squeeze on management time in the run up to an IPO and allow a company to take advantage of the market when conditions are optimal.
Pros
- New capital and liquidity
- Growth opportunity
- Publicity and increased public awareness
- Attracting talent
- Credibility
- Options and using shares as means of payment
Cons
- Cost
- Management time and distraction
- Investor appetite
- Regulatory requirements
Let’s consider the key factors in preparation of an IPO.
Strategic assessment and decision to IPO
So the decision to IPO in the first place is not an easy one. But if it’s your choice, you should start planning up to two years before the event, and as a minimum one year. To reduce interruption to business, it’s best to consider the timing of the IPO in the company’s macro growth cycle and more micro annual cycles.
Structure
At this initial assessment phase, consider the corporate structure and whether it’s suitable for an IPO. Key questions to consider:
- What will the listing vehicle be?
- Will a new vehicle need to be incorporated? If so, in which jurisdiction?
- Is the proposed structure optimised for tax purposes?
Corporate governance
On completion of the IPO, the company must adopt a recognised corporate governance framework. In the UK this is either the UK Corporate Governance Code or the Quoted Companies Alliance (QCA) Corporate Governance Code.
An important early consideration will be the board composition and experience. Questions to think about:
- Does the board as a whole have sufficient experience in the industry and in the capital markets sector for it to operate effectively as a listed company?
- Does the board have sufficient independent non-executive representation?
- Are board committees established to deal with audit and risk, remunerations, nominations, and so on?
Once there’s an appropriate structure, the board can begin to consider the broader corporate governance requirements and policies, such as corporate and social responsibility, that may need to be set up.
Valuation
Getting the right business valuation at the IPO stage is critical. Considering this early and discussing its suitability with external advisors can avoid any delays or disagreements before time has been invested in the process.
Financial documents to prepare
Management has to prepare and collate vast amounts of information for an IPO. From a financial perspective, the documentation to consider and prepare early includes the following.
Audits and historic financial information
A common requirement for public markets is a history of three years of audited financial statements, under IFRS. This audit task is significant if the company is previously unaudited, so should be a key focus during the planning stage.
Similarly, if the company hasn’t previously prepared financial statements under IFRS, it will need an IFRS conversion before the audit commences.
Interim financial statements may be needed for more recent periods.
Financial position and prospects procedures (FPPP)
In order to start trading as a public company, an entity must decide whether its procedures, policies and internal controls are sufficient and appropriate. An update of current systems is often required if they don’t meet the needs of a listing company. Specific areas to consider are:
- Suitability and capability of the finance team.
- Treasury or banking controls and management.
- Board structure and sub committees.
- Management accounts and financial reporting procedures.
- Risk assessment/management and board reviews.
- Forecasting and budgeting procedures.
- Group oversight and control.
Working capital projections and board memorandum
The directors of a company are responsible for signing a working capital statement at the point of IPO. This confirms sufficient capital is available for at least 12 months. To back up this statement, the company must prepare working capital projections for a period of 18 to 24 months from the IPO date.
These projections should be fully integrated and include a monthly cash flow statement, income statement, and statement of financial position, as well as the ability to be stress tested using the assumptions driving the model. For the model to be better understood, we would recommend a ‘working capital board memorandum’ outlining the key drivers, assumptions and sensitivities.
The preparation of this model and board memorandum is complex, so it should be considered well before entering into the IPO process.
Other considerations
- Equity story and marketing presentation
- Choice of market
- Administration tidy up – e.g. key contracts and employment agreements readily available
- Remuneration schemes
- Dividend policy
So early adoption of the financial reporting, legal and corporate governance requirements, and preparation of key documents can speed up the IPO process. It also means less management distraction at a crucial time in a company’s transformation.
If you would like more advice on any issues raised in this article, please contact Adam Humphreys or Joseph Baulf.
