Going public is the Holy Grail not only for a business itself – be it a start-up or an established business that has fought against the grain to prosper – but also for public investors in search of profitable opportunities. However, IPOs are not risk-free and are always subject to rigorous checks by investors and analysts. This is why it is extremely important to time your moves, prepare in advance, and ensure a successful transition to IPO. In terms of IPO readiness, a business basically has one single shot at success. Doing your homework properly can make the difference between a resounding failure and success. If you are seeking to go public in an IPO, this article might dispel many doubts.
IPO – a brief definition
IPOs – also known as initial public offerings – are the processes through which private companies sell shares to the public for the first time. In simple terms, an IPO is a fundraising method from public investors that translates into the ownership of the company stopping being private and becoming public. The motivation behind undertaking an IPO is usually related to raising capital for a wide variety of purposes: create liquidity for further growth, pay debts, diversify holdings, as a way for the business’ founders and initial investors to cash out on their investment, to increase market awareness, etc. The company’s shares will then be traded on a stock exchange.
However, IPOs are complex processes that require timing and appropriate preparation. According to Investopedia, an IPO consists of three stages:
The pre-IPO stage
This is a restructuring phase that prepares the company for public trading. Since the main purpose of this stage is to maximize the shareholder value, it usually implies developing a solid growth and business strategy meant to persuade prospective investors.
The IPO stage
This is the critical phase of the whole process as earning the investors’ confidence through positive media reviews and valuations from analysts can make the difference between failure and success. This is the point when most companies decide to delegate the filing to reputable accounting and law firms.
The post-IPO stage
It’s time for the company to execute the previously proposed business strategy and demonstrate it is in for the long run.
IPO Pros and Cons
IPOs come with a series of advantages and disadvantages. Here are the most notable ones:
Pros:
- Fundraising for further growth and diversification
- Increased exposure and credibility
- Possibility to use publicly traded stock as a payment means
- Easier access to bank loans and additional capital
- Exit opportunity for founders and stakeholders
Cons:
- Stricter regulatory requirements
- Loss of total control
- Coping with the market pressure
- Public information scrutiny
Under the COVID-19 scenario, the IPO market has broken one record after another. The U.S. market alone witnessed an all-time record with no less than 1035 IPOs in 2021. According to Stock Analysis, there were 150 IPOs in March alone:
The Fintech IPO market seems to be experiencing an unprecedented boom. According to TechCrunch, fintechs are slowly – yet steadily – entering the IPO scene, with companies such as Paypal or Shopify already worth over $100 billion.
The limitations caused by the pandemic compounded with the necessity to keep up with digital transformation have increased the presence and the impact of the fintech ecosystem. If we put together the innovative financial services and products provided by fintechs (i.e. digital banking, contactless payments, customized digital offerings, etc.) and the unprecedented IPO boom, this seems to be the right time for a fintech IPO. However, success depends on more than the right time and innovative products.
How do you know your business is ready for an IPO?
As we have already mentioned, an IPO requires more than the right timing and the right products. There are some key factors that must not be overlooked before embarking on the public market journey. Here are some signs that your business is sufficiently mature to go public:
The numbers must tell a past, present, and future story of success
If your business is profitable and registers sustainable and healthy sales growth, maybe it is time to consider an IPO. However, keep in mind that investors are looking for long-term profitability. If your business has already reached its peak growth or it will do in the coming years, an IPO might not be the best alternative.
If the quarterly financial statements are always delivered timely and audit-ready, your company might be ready for an IPO.
Your business consistently delivers against your forecasts
Before you even take an IPO into consideration, it is important to ensure a minimal difference between your actuals and forecasts.
You have robust future plans
An IPO shouldn’t alter a business’ future plans. In fact, an IPO should be a funding alternative in conformity with your business expectations. If your plans are robust enough, your business shouldn’t have troubles thriving even if the IPO is postponed or even cancelled.
You outrun competition
When it comes to business, rivalry is inevitable. In order to attract investors, a business needs to outpace the competition and demonstrate it is in for the long run by dominating its industry segment. Additionally, if your business brings to the table a patented product/service, a large and growing target market, and a unique business plan, you have high possibilities to attract the right public investors.
All the above-mentioned points represent the backbone of a profitable, solid business. However, going public requires thorough preparation. Here are some key points you must not overlook:
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Do your homework before considering an IPO.
Which are the differences between a private and a public company? How would an IPO affect the company? Will investors find the growth prospects and long-term business strategy attractive? Is going public the ideal alternative to get a return on the money, time, and effort the founders have put into the business? Are there other options? These are only some of the questions you will need to answer before considering an IPO.
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Is your executive and management team ready to run a public company?
A company that plans to go public must not only rely on an experienced and dedicated board of directors and management team but also boast enhanced financial reporting and internal controls. Ideally, your management team should be experienced in running public companies. Since the company does not a have trading history, the most plausible way for initial public investors to assess the risk is to dissect the performance of the corporate team.
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SEC compliance
A publicly-traded company has to continuously report and disclose a wide array of financial, operational, and strategic information. That means that your competitors will have access to all this data. Reserving any type of information that could give your company an unfair advantage could face harsh penalties. What’s more, you should keep present that the SEC regulation requires compliance with enhanced accounting standards.
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Analyse the competition
A company that aims to be highly valued must make sure that its metrics are competitive. Otherwise, it may end up with a lower IPO valuation than its competition. This ultimately translates into a loss of public interest and may have disastrous consequences. Before even considering an IPO, it is advisable to analyse the relevant competition and compare your business with similar ones. A comparative analysis will allow you to estimate the worth of your company.
Software solutions for IPOs
As we have already mentioned, going public implies getting scrutinized by investors, regulators, and auditors. Fortunately, there are multiple software solutions that can streamline the IPO process. Here are some examples:
Financial Management Software
For instance, Sage Intacct is cloud-based accounting software designed to support workflows, screens, preferences, and automate daily processes such as invoices, payments, expenses, etc.
Equity Management Software
Equity management software is designed to facilitate the administration of all the equity-related activities (e.g. maintain compliance, issue equity, etc.) There are multiple available solutions: Factorial, Ledgy, Pulley, etc.
IPO and S-1 Filing Software
Filing an IPO is a complex task that requires accurate document creation, filing, printing, distribution. Software solutions such as Workiva, do not only ensure accuracy but also eliminate risks.
Wrap up
What an IPO basically does is diversify a solid business’ options and open up new ways of expansion. Whether your business is ready for an IPO or not should not be the main concern. Building a robust business that will thrive – with or without an IPO – should be your primary focus. Above all, the checklist we have provided will hopefully help you get a more accurate idea of whether your business is on the right track or not. An IPO might be the next logical step.
