Is your SME Business IPO ready?

There are significant benefits to becoming a listed company, including access to public market capital to fund growth, research and development, new product introductions, and acquisition opportunities. An initial public offering (IPO) can also have a significant impact on your company’s brand and ability to compete in the marketplace.

However, ensuring you are actually ready to operate as public company is critical before making the leap.

With regards to main board IPO the conventional wisdom says that growth companies get ready to go public when they reach a certain revenue threshold in annualized sales and has at least few years and quarters of profitability under their belts. This theory is based on the idea that a company must be large enough to both: (a) withstand competitive pressures and (b) earn a large enough market value to enable the company to sell enough stock to institutional buyers in its IPO, without suffering massive dilution in the process.

 

However, with regards to SMEs the case can be slightly different.  SMEs are generally considered as low credit institutions by the investors. They are usually treated as unreliable place for investments. This can be readily observed from trading pattern on the SME exchanges. For instance out of 450 plus companies listed on the SME exchange only 30-40% are traded on a regular basis. The evident fact which remained unnoticed is that 90% of SME businesses fail within a short period of time. The investments made by venture capital and private equity investors in small to medium growing companies are made with an assumption that 9 out of 10 companies would fail to perform.

 

So how do you decide whether your company is ready for the IPO that will sail through easily and create long term value for the investors?

 

Even though the prospects of public attention and an influx of money can be very tempting for business owners, it is still very important to sit down and seriously consider if your company is ready. You need to ensure you have the right vision, plans, people and partners in place.

Strategic Vision: People are not going to invest in a company if it has few growth prospects or if it has a product or service that is relatively mundane or uninteresting. Investors are also going to want to see a long-term strategy for the company and innovation plans, especially if the market is saturated with competitors.

Visibility & Predictability: If your business has reached required threshold in revenue & profit and you know with high precision what next quarter, or even next year, is going to look like, you pass the test. On the other hand, even if your business has high turnover but you can't reliably predict what would be around the corner, than you need to watch out. If you miss guidance or analyst expectations by even a 3% once you're public, your stock will likely plunge, often causing employee morale to suffer and competitors to be emboldened. The stakes are high -- take the time you need to ensure that you have built predictability into your company before your IPO.

Growth Potential: If you're growing fast and have a large market in front of you the investors will reward you. If, on the other hand you go IPO without much more potential don't expect to have a roller coaster ride as a public company. You need to have several tricks up your sleeve for future growth. You may not know all the growth vectors you plan to open up in the future, but you should have a game plan before your IPO.

Transparency, Compliance & Communication:: A listed company is fully exposed to the world and is responsible for fair disclosure of information. One of the trickiest tasks for a newly listed company is complying with Securities regulations. Merchant Bankers usually suggest hiring a specialist investor relations and human resource professionals to manage compliance reporting. The shareholders and investors would expect the company to have a consistent communication engagement via aggressive investor relations programs. You need to be also aware that certain news might affect your IPO and the price of your stock. You need to be comfortable with communications and proactively use public relations to profile your company, engage key opinion makers, disseminate information and key messages. If you cannot hire a full time manager on a company roll it is probably best to hire an outside expert agency that generally have communication capabilities to reach out to investor community, analysts and media outlets.  

Management Profile:  Many people look at the strength of the team and board of directors while making an investment decision. A public company must have experienced leadership that is dedicated to growth and complying with regulations on financial reports and has interest in sticking with the company for the future. The quality of the leadership team, including the board of directors and senior management, is a key factor for potential IPO investors. As a company looking to go public, you’ll provide half yearly (i suggest do it quarterly) and annual guidance to market investors and analysts. Potential investors will evaluate your leadership team and look for gaps that could affect your company’s performance and reputation. 

Market Condition: Even the most promising IPO can be quickly derailed in a bad and volatile market. A market in decline usually sees a reduction in investor appetite and the number of IPOs. A company must be comfortable in projecting market trends and be prepared to modify timetables or plans if necessary, especially if economic conditions are worsening.

Vulnerability Assessment:  The best companies have no single points of failure. Do you have a very large customer or two? A dominant supplier or distributor? A huge competitor? Or, are you beholden to a single platform, technology or regulatory regime? Any of these concentrations may be fine as you're building up your business privately, but once you're public, expect these facts to be scrutinized. Share holders and investors hate this type of risk. They've been burned many times before. This shouldn't be unexpected – when another company realizes you rely upon them, they'll often extract a lot of value. Before considering an IPO, remove single points of failure. Even if this means growing more slowly for periods of time, the tradeoff will be worth it.

Right Partners: Surround yourself with the right team and the right experience that will assist in taking your company public.  Your Merchant Bankers, Underwriters, Financial Team,External Legal Counsel and Accounting Partners will be key collaborators.

Another key consideration: How will you handle investor relations? Some companies have an in-house team; others hire outside firms. Companies that work successfully with external partners integrate them into their IPO process early so they can understand and help develop the positioning of the company well before investor dialogue begins. An experienced external team will help you navigate the complicated road to an IPO, including coordinating a roadshow, marketing your story to investors, and guiding you through the complex and regulatory process.

An IPO is one of biggest milestones for your SME Company. The road to an IPO is not straightforward and involves myriad decisions for you and your leadership team. But it can be rewarding and profitable with the right team, plan, and partners.