Business owners often have misperceptions about the IPO process. Marcus Stuttard, Head of UK Primary Markets and Head of AIM at London Stock Exchange Group (LSEG), says: “Some still believe, that in order to go public, their businesses have to be valued at hundreds of millions of pounds or have hundreds of millions of pounds of revenue. But that is simply not true.”
London Stock Exchange has markets catering to both large and small businesses. The ‘Main Market’, home to 1,165 companies, is indeed geared towards larger, more mature businesses; with 75% having a market value over £100million. However, its international growth market, ‘AIM’ has nearly as many listed companies (941) and is specifically geared towards reducing the cost and regulatory burden of smaller, growth businesses. On AIM, 75% of businesses have a market value of less than £100m with more than a quarter valued at less than £10m.
But who should be considering an Initial Public Offering (IPO)? Why? And how to go about it?
To list or not to list?
Marcus has found the majority of founders that list their businesses want to continue to grow them, and don’t want to sell to a big corporate, or even take on a private equity fund as an investor (which would want board representation and influence). By going public, management teams keep more control over the day-to-day running of the business.
He stresses that one of the main reasons for listing (especially on AIM) would be having continued access to long-term capital for growth. In 2017, companies raised £1.6bn from IPOs on AIM, while already listed companies raised £4.8bn through further capital raises. So for companies with a capital-hungry growth strategy, such as a plan to make multiple acquisitions, listing can make a lot of sense. It can also be an opportunity to provide an exit for existing investors, such as business angels or venture capital funds, or a partial exit for owner-managers, who will be able to ‘take some money off the table’. It would be unusual for an owner-manager to fully exit the business on listing but it is feasible over time, as management succession is implemented.
Having freely traded shares is another advantage. These can be used to incentivise staff or as a currency to pay for acquisitions. There are also benefits to having the more visible public profile, which draws the attention of investors, customers and suppliers. Salmaan Khawaja, Director, Corporate Finance at Grant Thornton, and a leading adviser to AIM listed companies, says the personality of the CEO is often an influential factor in the decision to list. He has seen clients who have been very uncomfortable with the public scrutiny as well as clients who have loved the high profile; being quoted in the press; and being seen publicly as a sector leader.
Downsides of listing
The IPO process is not cheap. According to Marcus, a rough estimate of the ‘all-in’ costs of an IPO would be around 7.5% to 8.5% of the money raised, but this can vary, and depend on how well prepared the company is.
After listing, there are also the costs of retaining a nominated adviser (compulsory on AIM) and a broker. And listed companies will spend money on public relations and producing glossy accounts, which it probably wouldn’t as a private company.
There is also a management time cost. Marcus says the CEO and CFO in particular have to spend time building up relationships with institutional investors.
And listed companies have to deal with (sometimes volatile) investor sentiment, as evidenced by the high profile Snap Inc. IPO in March 2017. In the five months following the IPO (after a brief post-IPO price spike) Snap had lost more than 30% of its listing valuation, amid intense investor scrutiny of executive remuneration and corporate governance.
Where to start?
Salmaan says one of the most important things is to have sufficient time to do the detailed homework: to evaluate if a satisfactory valuation can be achieved on public markets; if public markets are the right place for your business; and if they are, to establish what needs to be done to get there. The correct advisers will help with an IPO readiness assessment to determine appropriate timings and an action plan.
Expect to get into the minutiae of financial track record, financial reporting procedures and controls, transaction structuring, corporate governance and leadership.
A useful, more detailed guide for entrepreneurs is available from LSE.
And you can read about some of AIM’s entrepreneurs who took their businesses public in the AIM Guide for Entrepreneurs.