There are many positive reasons to think about selling a stake in your business on the public markets, but it will need to be in the right shape, explains Joanna Scott
Business owners consider floating their companies on the stock market for all sorts of positive reasons. You may see selling a stake through an initial public offering (IPO) as the key to securing growth capital for the business without having to give up control, as a sale to a single buyer might require; that’s attractive if you have long-term plans for staying with and building the business. You may see equity finance as preferable to debt capital, enabling the business to grow without adding to its gearing. You may even see an IPO as offering your business valuable credibility with its customers in the marketplace.
However, an IPO is not appropriate for all businesses. If your company isn’t in the right shape for the sale process, it’s unlikely to succeed. And as its owner, you also need to be well-prepared for a successful IPO. If you can’t answer these seven questions positively, your business may not be ready for an IPO:
Q1. Does your business have a clear value proposition?
Your business should have a simple, easy-to-understand message about what it does and how it will succeed – and that message needs to resonate with investors considering putting money into the company. Everyone at the business needs to know what the message is, and they should be able to articulate the vision.
Q2. Is there a proven business model?
Investors won’t put their money into businesses that haven’t at least started to prove their potential. Your business need not necessarily to be profitable, but it will need to be more than just a good idea, with a track record of growing revenues that suggest the business model works and is sustainable. Its earnings need to be visible so that investors can see where those revenues are coming from.
Q3. Can you demonstrate the business’s growth potential?
It’s not enough to point to the success you’ve had so far; you will also need to convince investors that this success is set to continue and grow. You will need to be able to set out the business’s growth strategy, identifying a clear market for its products and services and a potential route to exploiting that market. Address its potential to generate cash, since this is what could eventually sustain dividend payments to investors.
Q4. Can you explain exactly why you’re embarking on an IPO?
Your business needs to be able to explain why it wants to float, and why now – that is, how the IPO relates to your growth strategy for the company. If you’re raising money for business investment, for example, you’ll need to explain where the funds will be allocated, with what purpose, and what returns you expect.
Q5. Can you convince investors to back your business?
Successful businesses have a unique selling point (USP) – that is, they offer something that isn’t obtainable elsewhere. Investors will want to know about your business’s USP: both what it offers its customers that they can’t find somewhere else, and what is so unique about it as an investment proposition that they should buy its shares.
Q6. Is your management team well-qualified and committed to the long term?
The quality of the management team is a crucial consideration for investors in any business. They will scrutinise the qualifications, experience and track record of your senior leadership. Investors also want to see commitment; it may be that as part of the IPO, one or more founders is exiting the company or stepping back, but investors will expect to see a management team determined to carry through a medium- to long-term plan for the company.
Q7. Does the business have good governance structures in place?
Investors will want to be sure your business is properly set-up with a well-balanced board that includes non-executive directors as well as executives. It should also have a full-time finance director. You will also need to check the specific requirements of the stock exchange on which you hope to list the business. Even lighter-touch exchanges such as the Alternative Investment Market have minimum standards with which members must comply.
It is common that fast growing businesses will raise a funding round prior to an IPO in order to put the company in the best shape possible prior to the IPO fundraise. A pre-IPO funding round can enable to achieve key milestones that will help businesses reach the IPO stage. Download The Growth Lending Guide to learn more and discover how Growth Capital can help your business reach the IPO stage without equity-loss.