Research reveals that, before the outbreak of COVID, 2 in 3 businesses had planned on investing in capital in FY21, which asks the question of whether the asset write-off threshold should be extended further. The figure comes from an independent survey of 261 Australian businesses – 88 per cent of which are SMEs – commissioned by Money.com.au, Read More…
Let’s talk: Taking your company public with an IPO
May 10, 2019: A large banner with the Uber logo hanging on the New York Stock Exchange on the day of the initial IPO in lower Manhattan.
Wed 4 March 2020 - 8:17 amFeatured | Let's Talk
Many businesses, including small businesses, will look at going public with their company via an Initial Public Offering (IPO) at some point on their business journey. Many well-known big players and ‘unicorns’ have taken this decision, such as Airbnb and Slack, and most recently Uber.
Like most things, there are advantages and disadvantages of going public. The advantages include:
- Potentiality for huge growth due to raising large amounts of capital (the most common reason for Initial Public Offerings)
- Become a more reputable company; public companies are often seen as more trust-worthy and respectable
- An ability to acquire other entities or merge with other companies
- Hiring and attracting the best talent through combined reputation boost and better compensation packages
- Can offer initial venture investors an exit strategy, or increase their investment value
Conversely, the disadvantages of taking a company public include:
- Financials are made public
- Less flexibility and choice managerially speaking, as there will be more influence from investors
- Increased regulation policies and oversight on this
- Chances of increased liability
- The costs involved; it can be expensive and timely, especially for small businesses to go public
An IPO is not guaranteed to be a success; when Uber went public last year, it was hailed a bit of a disaster for the company. When the stocks closed in the IPO, Uber subsequently had an extremely low valuation – that it hadn’t seen since 2015.
Before that, in 2018, there were predictions that it would go public at around $120 billion (US). However, when the company finally got round to going public, shares actually only sold for $45 which meant the actual valuation a year later came in at around $75 billion (US).
Uber’s competitor (in the US), Lyft, also struggled after it went public a few months earlier, losing approximately 12% of its stock value on only the second day of trading.
Both of these IPO stories created a huge buzz as it was the first time investors could get involved in the ride-sharing tech giants.
As briefly mentioned above,the most likely reason a private company will choose to become publicly traded is because they are seeking a capital boost.
If raising capital is the reason you may be considering going public, there are some key things you should consider beforehand, and some key steps to follow to make it a success.
We aim to provide you with the best advice possible on what you need to tick off in order to avoid the downwards spiral of the likes of Uber and Lyft; such as a large market, a strong business model, a unique offering and so on.
Today our experts share their thoughts and advice on this for you; answering our question of “What do you need to know before going public?”
Kenneth Gitahi, Senior Associate, Sierra Legal
A proprietary (or private) company may consider going public (that is, converting to an unlisted public company) to make it easier to raise capital from the general public. However, this benefit needs to be weighed against the increased regulatory and cost burdens that apply to public companies.
The requirement to hold an AGM, appoint an auditor and prepare audited financial reports, are among the key regulatory and cost burdens that public companies face. Public companies also pay a much higher annual registration fee and they must have at least 3 directors and at least 1 company secretary. Removing a director of a public company can only be done at a general meeting by shareholders (and not by directors). Removing an auditor requires ASIC’s consent.
Even greater regulatory burdens are faced by public companies listed on a stock exchange, which must also comply with the rules of the stock exchange.
Seeking independent professional advice before going public is vital.
Glyn Yates, national head of corporate finance, RSM Australia
An initial public offering (IPO) can achieve exponential businesses and profit growth, but it does include stricter compliance and rigorous reporting to succeed. Committing to an IPO is a significant step, so business due diligence and transition planning are essential.
The first consideration is to create an IPO advisory team with experts across legal and financial fields, including candidates with strong backgrounds in transactions, audits and taxation. Although not an obligation, business due diligence is strongly recommended to limit the risk of future liability and ensure the company makes informed decisions.
To meet new compliance regulations, businesses must have a thorough understanding of legal prerequisites. This might entail reforming current practices, and reviewing tax structures to consider the business’s risk, concessions, accurate reports, governance, employee incentives, attributes, and dividends.
Michelle Gallaher, CEO of health data analytics company, Opyl
Investor relations and compliance is a mindset that requires commitment, consistency and confidence. It takes up a significant amount of time, which means time management is really important.
Winning and failing in full view is daunting but it can also be exhilarating.
Your worth as a CEO is not always correlated with the share price, particularly during pivots or periods of recalibration and development when the share price might be low and below the true value of the company. The hardest working CEOs are the ones who are driving strategic change with their backs against the wall, yet salaries and share price don’t usually reflect the value they are creating, especially in small cap stocks.
News flow needs to be authentic and genuine material. You’ve got to be mindful that shareholders don’t know the full story usually until after events happen so they will speculate and guess if you don’t give them clarity around your strategy. This can be hard to do, particularly during times of strategic change and experimentation.
Disclosure! Learn the rules, I can’t stress this enough. Remind and teach your team, including board members.
Vlado Bosanac, Founder and CEO of health tech MyFiziq (ASX: MYQ)
An IPO is usually only a good fit for a company that can prove it has strong growth potential and can bear the increased in scrutiny the process brings. An IPO can be used as an effective means of raising new capital to help achieve and accelerate the growth strategy of a company. An IPO can also be used to create a liquidity event for a company’s existing shareholders. When looking to grow the company through mergers or acquisitions, being listed also provides the company with a new way in which to finance potential acquisitions. Listed shares are also a great way to reward and attract key personnel for the growth of the company.
An IPO will not be a good fit for a company if it is still developing its long term business strategy and does not have a clear and well explained use for the capital that will be raised. Furthermore, a company should not IPO if it is not yet prepared for the additional regulatory and shareholder scrutiny that comes with being a publicly listed company.
Kyahn Williamson, Group Head – Investor & Corporate Communication at WE Buchan
The right time to IPO is different for each business. Although the need for an IPO might be apparent, including to raise capital or validation for early stage companies, it doesn’t always mean the company is ready. Before listing, a business must ensure it has the systems in place to ensure it can comply with its reporting requirements to the ASX – there’s no such thing as an extension! – and strong corporate governance.
It’s important that the company can articulate its reason for listing, the reason why its product or service fulfils a market need and how it intends to deliver shareholder value in the short and longer term. That can’t be sugar coated; every business has its risks and a team that is realistic about what risks its business faces and how it mitigates against them can give extra confidence.
It’s also important to remember that the market can be unforgiving if a company misses its promised milestones or guidance. Therefore, the best time to list is when a company is confident that its path to an inflection point that will generate returns for its investors is clear and unencumbered. This significant milestone might be reaching a crucial stage in product development or approvals, reaching a certain threshold of market share or showing a clear pathway to profitability.
Considering taking your business public in the near future? You can read a fantastic advice piece on developing a solid Public Relations strategy your company’s IPO here.