2013 ended with a flurry of Initial Public Offerings (IPO) as a number of companies floated on the Australian Stock Exchange (ASX). This heightened activity together with the success of popular floats such as freelancer.com may lead many private businesses to consider listing via an IPO.
Certainly, market sentiment is improving. However, it is important for business owners and directors to be aware of both the advantages and disadvantages of listing and to understand the steps involved in preparing to float before making any decisions.
The decision to float
The decision to list on the ASX will be determined by a number of considerations including industry specific factors, competitors’ behaviours and market sentiment.
However, perhaps the most influential consideration will be your personal and corporate goals. Are you looking to raise extra capital, to boost the company’s profile or to achieve an exit for existing shareholders?
Having identified your primary goals, it is important to look at the IPO process objectively, including its advantages and disadvantages, and to assess whether an IPO will deliver on these objectives or if another strategy may be more appropriate.
The table below outlines some of the advantages and disadvantages of listing on a stock exchange.
| Access to capital
Listing will give your company the opportunity to raise capital to fund acquisitions and/or organic growth and to pay down debt. It may also mean that your company will find it easier to attract institutional and professional investors.
| Increased costs
The costs do not end once the IPO completes. Ongoing costs include annual listing fees, shareholder meeting costs, director fees and audit costs.
|Higher public and investor profile
Listing generally raises an organisation’s public profile with customers, suppliers, investors and the media.
| Increased Scrutiny
Both the company and directors will be subject to much greater disclosure and reporting requirements both during the IPO process and subsequently as a listed company.
Being listed generates an independent valuation of your organisation by the market; it may also improve your company’s valuation.
| Exposure to market sentiment
Listed companies are generally more affected by market conditions and sentiment. A poorly performing market can influence the valuation of your business regardless of how well it is actually performing.
|A market for your company’s shares
Trading of your shares on a stock exchange improves the liquidity of company shares and gives current shareholders the opportunity to realise some of the value of their holdings.
| Loss of control
The current owners will relinquish some control and there will be greater accountability to shareholders.Listed companies may also be the target of a hostile takeover which may see your control of the company lost.
| Alignment of employee / management interests
The process of remunerating your employees, executives and directors with shares is simplified, making it easier to align the interests of your employees with the goals of your company
|Distracted Management Team
During the IPO process a substantial amount of your management team’s time will be taken away from day to day task of running the business and will be focussed on the IPO.Management may be focused on short term gains through share price movements which may encourage decision making that is not in the best interests of the company in the long term.
Am I eligible to list?
In order to be eligible for listing on the ASX, a company must meet the following size criteria:
|Net Profit||The company needs to have generated a minimum of $1 million in net profit over the past three years and a minimum of $400,000 in net profit over the past 12 months; or|
|Net Tangible Assets||The company must hold a minimum of $3 million in net tangible assets; or|
|Market Capitalisation||The company must have a minimum market capitalisation of $10 million.|
While the above are the minimum requirements, the net profit, and particularly the anticipated growth in net profit, need to be intertwined with a compelling purpose for a listing to make sense.
Once listed the company must also comply with rules relating to the size and structure of the shareholder base.
Preparing for an IPO
Preparation is the key to any successful IPO. In order to prepare your company for listing, various issues will need to be considered. These include, but are not limited to:
- Timing – When is the most appropriate timing for the listing in terms of both the business and market conditions.
- Funding – The amount of funding required by the company to finance the growth of the business and the strategy and timing behind that growth and how much equity will need to be given up to secure this required level of funding..
- Skill gaps – Skill gaps at the senior management and board level will need to be resolved in a listed environment.
- Information systems – A review of your company’s operational, financial and management information systems to ensure that they are sufficiently robust for a listed organisation.
- Continuous disclosure – Is your company prepared for the greater disclosure, accountability and transparency that will be required after listing including compliance with corporate governance best practice?
- Structuring – Initiatives (e.g. acquisitions, restructures etc) that need to be completed before listing including determining what assets are to be included in the listing and how assets will be dealt with that will not be included.
- Tax – The tax issues that may need to be resolved including consideration of tax consequences of any restructuring of the assets of the company prior to listing.
- Investor expectations – What will investors’ expectations be in terms of profitability and dividends after listing and how does that fit with your business ethos
Once these issues have been dealt with, the process of taking your business public can begin.
The IPO process can be summarised in seven steps as set out below:
1. Appointment of advisors – appointing experienced advisors is essential to the success of an IPO
2. Preparing the prospectus and due diligence – running concurrently, the due diligence process seeks to ensure the information contained in the prospectus meets legal requirements and provides a potential user with information that they can rely on to make their investment decision
3. Institutional marketing program commences –certain marketing activities can be undertaken to institutional investors, including IPO roadshows, to generate interest in the offer.
4. Lodge prospectus with ASIC – prospectus is subject to a public exposure period and ASIC has the power to stop the offer if it requires changes to disclosures in the prospectus
5. Lodge listing application with ASX – review process typically takes six weeks
6. Marketing and offer period – offer to retail investors starts after the exposure period and is usually open for three to four weeks
7. Offer closes, shares allocated and trading commences.
The IPO process will typically take at least five to six months to complete, but this will be heavily dependent upon on ready your business is prior to commencing the process.
For further information on the process involved with conducting an IPO or for advice on whether your business would be suited for an IPO, please contact your local William Buck Corporate Advisory specialist.