The time to consider taking your company public is often just as you have gotten your business to a certain level of success. Your product or service is in high demand by the customers you targeted, your team and staff are excited to be part of such a fantastic growing company, your business is featured in the media and attracting buzz, and people cannot seem to stop talking about your company. From the outside looking in, the company looks set to take off.
However, the reality within the business itself may be different. The business is poised to grow, but the cash the company is generating is not enough to make those expansion dreams come true. These can include entry into new market segments, expansion into another geographic location, or hiring highly skilled and specialized resources. You worry about how to fund your next growth stage and begin to consider your options.
First, you might consider the banks. Traditional commercial banks struggle to risk their depositors’ funds by lending to you for a variety of reasons including:
- Your financial statements and projections do not reflect that you can repay their loans within their required timeframe.
- You do not have enough equity in the business or “skin in the game”.
- You do not have enough hard assets or collateral to cover the amount of the loan plus a buffer to account for fluctuations in asset values.
If commercial banks are not for you, the equity markets can be attractive. Recently, especially in Caribbean territories such as Jamaica and Trinidad and Tobago, there has been a strong push to encourage young private companies to seek capital via listing on their local stock exchange as part of an Initial Public Offering (IPO).
There are several benefits to preparing an IPO and listing on the stock exchange. In Jamaica, companies that list on the Junior Stock Exchange receive a full income tax holiday for the first 5 years after listing and a 50% income tax reduction during years 6 through 10. The same incentives have been offered to SMEs operating in Trinidad and Tobago by the country’s Minister of Finance in the country’s National Budget for 2020/2021.
While these incentives provide young private companies with an avenue to access patient capital to fund growth and expansion, there are significant hurdles to overcome to ensure that your company:
- Is ready to go public,
- Has a successful IPO, and
- Can continue to grow after the IPO.
What To Do Before Going Public?
The decision to go public should not be a hasty one – it should be an evolution that you prepare for at least a year in advance. In my previous investment banking career, we advised companies to do a series of private equity financing deals before going public. This helps instil a routine and system of reporting to shareholders, as well as addressing internal governance and controls issues before exposing your business to the public market.
Before going public, you should ensure all documents and disclosures are prepared, customer insights and feedback are collected, and financial controls are in place. I elaborate on each of these below:
General Housekeeping (Getting Documents in Order)
To prepare for an IPO, your company should have the following documents ready, available, and organized at all times:
- Company’s Incorporation Documents
- Records of meeting minutes
- Share register
- Shareholder’s agreement
- Copies of major contracts such as lease agreements and customer contracts
Additionally, adequate disclosure should be provided for any outstanding or potential legal matters. As much as possible, such legal matters should be dealt with before closing a financing round, or clearly set out at an early stage in the discussions with a potential investor.
Any successful company, especially a public company, has a thorough understanding of their customers, their needs, and how to best serve them and connect with them.
It is not enough to have a standout business – to be successful, you must be in tune with what your customers are seeking. Understanding your differentiating factor is key to maintaining a competitive advantage. Similarly, understanding why your customers choose you over a competitor speaks to an understanding of your customers’ behaviors and needs.
To stay in touch with those needs, ensure that you are constantly collecting feedback from your customers. Feedback from customers is a source of rich information about your product or service. Often provided in real-time, the feedback can indicate what you need to adjust and can also identify opportunities for diversification or growth if your customers are asking for new or enhanced products/services.
Customer feedback mechanisms can be as simple as a customer feedback form/short survey, an email asking for a rating or review, or a follow-up phone call.
The type of product/service you offer will determine the frequency of customer feedback that is most useful. If you run a service business, it could be at the end of each service provided or at every customer touchpoint. If you run a project-based business, it could be more useful at the end of each project. If you are offering a product, it could be after each purchase.
The frequency of customer feedback speaks to how engaged you are with your customers and their user experiences and demonstrates your commitment to improving customer service.
Lastly, no IPO would be possible without demonstrated financial controls. Financial controls are the procedures, policies, and means by which an organization monitors and controls the direction, allocation, and usage of financial resources. They are at the core of resource management and operational efficiency in your organization.
Maintaining accurate and up-to-date financial records is an important component of a strong financial control system and will be key especially as your business starts to scale rapidly. This ensures that you are aware of what cash you are meant to receive in the future and what you are obligated to pay. This gives a more complete picture of the performance of your business than cash alone.
Monitoring the changes in profits monthly, allows your company’s management team and investors to keep close track of the financial performance and health of the company from one period to the next. This provides further support to management’s explanation for any activities that would have led to the performance being reflected in the financial statements.
With a high volume of transactions (>20/month), it is advisable to rely on accounting software to reduce human error and ensure timely updates. Having a system and software in place assists in ensuring that all records are properly maintained and may ease the process to prepare accurate and reliable financial statements.
These are just some of the many issues to consider before deciding if your company is ready to embark on the IPO process. It is more of a marathon than a sprint, and not a decision that should be taken lightly.
How to Launch Your IPO Without Any Problems
Your process for listing on the stock exchange should resemble the following steps:
- Select Your Team of Professional Advisors
- Outsource the Business Valuation Exercise
- Prepare the Prospectus
- Complete the Registration and Listing Applications
- The Road Show – Marketing the IPO
Select Your Advisory Team
It is advised that you engage the following professional advisors as early as possible:
- Business Financing Advisor – though optional, the right business financing advisor can save you a significant amount of time and allow you to focus on running your company. The degree of assistance this advisor provides in the IPO process will depend on your needs. Some of the services may include:
- Assessing your business strategy and financial feasibility,
- Advising on the development and assessment of your business plan and financing prospectus,
- Preparation of a business valuation to determine the price at which you offer your shares to the public, and
- Connecting you with the right investment bankers and stockbrokers to coordinate the IPO.
- Professional Business Valuator to lend credibility to the offer price you determine for your shares. This is discussed further below.
- Investment Bankers / Broker-Dealers / Underwriters – whose role is to
- Review your company’s management team, business model, business plan and financial position,
- Structure the offering to match your company’s needs with those of investors,
- Work with you and your business financing advisor to finalize the issue price of your company’s shares
- Arrange the issue of the shares and potentially agree to purchase any unsold shares thereby ensuring full subscription.
- Ensure the successful sale of the shares to the public investor market.
- An attorney with knowledge of the relevant local legal framework and laws to prepare the legal documents.
- Accountants & Auditors who understand legislative framework and tax issues and will be responsible for the accurate preparation of your company’s financial statements.
- A stockbroker who will be responsible for making the application to list on the stock exchange.
The IPO process starts by engaging a lead underwriter (typically an investment bank) and negotiating a deal, whereby you both agree on the amount of money that is to be raised in the IPO, the type of shares that are to be issued, and the level of risk that the underwriter would assume in the IPO.
For instance, the underwriter could acquire all the newly issued shares and resell them in the public market, acquire none of the securities and simply sell the shares on your behalf, or syndicate the total amount to be raised with other underwriters to reduce the responsibility for selling the total issue.
Valuation and Pricing
A professional business valuation lends gravitas to the IPO application/submission. It is recommended that you look for a qualified valuation professional who also understands your business.
As discussed earlier, it is crucial that as a business owner, you have systems in place to have your financial information readily available for the valuator, demonstrating years of historical performance and metrics which can be extrapolated going forward. This is critical as valuators will need to understand the proof and research behind your company’s future growth expectations.
The report you receive from the valuator will be his/her professional opinion, expressed in a range of values. It is up to you and your business financing advisor to determine how to use this information and at what price you will offer your shares to the public.
For your IPO to be successful, I highly recommend that you price your offering at the low-to-mid end of the valuation range.
Note that the largest portion of your investor audience (in dollar size) will most likely be institutions with large investment portfolios and cash holdings. These institutions are typically staffed with specialized finance professionals whose job is to maximize return by investing at prices below your company’s fair market value. If they deem your company’s shares to be overpriced, this would inevitably hurt your chances of having a successful offering.
Prepare the offering memorandum/prospectus with the assistance of your business financing advisor. This prospectus is a detailed document that will include the following:
- Background information on the company: This gives the description and history of the company and the industry, its prospects, operations, and succession plan.
- Audited financial statements: While this requirement may be prohibitive for younger companies, having a recognized accounting firm prepare and audit your financials lends additional credibility to investors.
- Business Plan: The business plan provides important information for potential investors. It details growth projections, as well as the developmental and strategic goals of the company.
- Use of funds: This shows the main uses of the net proceeds from the sale of shares. This may include the particulars of any major assets to be acquired, prospects to be developed, or any other expansion plans you have for the company.
- Key Team Members and Major Shareholders: The prospectus must give the names, main occupations, and addresses of major shareholders, senior officers, directors, and senior management, together with their equity holdings in the company.
The next step would be to prepare and file the prospectus with the relevant securities regulator.
Registration and Listing
Below is a general outline of the process for listing on the Trinidad and Tobago Stock Exchange. Note that the registration and listing process might differ by territory, so be sure to research the process in the jurisdiction where you plan to list. ,
- Register with your local securities and exchange commission as a Reporting Issuer.
- Submit a listing application through your appointed stockbroker.
- Execute of listing agreement once the listing application has been approved.
- Deposit a block of shares with your local Central Depository to facilitate the trading of the shares on the stock exchange.
- Provide evidence of the appointment of the stockbroker.
A detailed description of the process and costs associated with listing on the Trinidad and Tobago Stock Exchange (TTSE) can be found here.
The Roadshow: Marketing the IPO
At this stage, you would work with your underwriters (investment bankers) to pitch the shares to institutional investors in the lead-up to the actual flotation. This is what is referred to as the “roadshow.”
All the work you would have done previously was to prepare you for this stage. As I mentioned earlier, institutional investors may be motivated to buy into the securities if they believe that the price would increase after the IPO date.
The business of raising capital is an extremely competitive one and your company must be able to get on the investors’ “radar screens” – people need to know about the IPO and the company in order to invest.
Reputable investment banking and brokerage firms have well-established networks to assist small businesses in their initial public offering (IPO). Maintain a close relationship with your brokers and ensure that they are speaking to their clients and stakeholders and get feedback. Their job is to do the selling/heavy lifting to bring in the investors after you give the pitch of your company, vision, and growth plans.
To keep analysts and investors interested in the company, your company’s senior management must be available to participate in industry sector conferences, talk to analysts, and maintain contact with institutional investors.
It is also recommended that you leverage public relations (PR) practitioners to assist with publicity by working with media sources such as radio, TV, and other popular channels to get a wide range of stakeholders involved.
9 Things to Expect After Your Company Goes Public
Once your business goes public, it is no longer just about you, your founding team, and the limited number of investors you had before. Now you may have hundreds or even thousands of investors in your company – these are hundreds of people looking at what you are doing, looking to see if you were a good investment or not.
The stakes are now higher so your company would need to operate differently.
mentioned the considerations that must be made before taking your company public. Here, I outline nine things your company can expect after it goes public:
- The Responsibility of Being Successful and Sustainable
- Increased Visibility
- Disclosure Requirements
- Increased Recurring Costs
- Short-Termism in Shareholders
- Greater Access to Capital
- Enhanced Liquidity
- Improved Valuation
- Future Capital Raises
The Responsibility of Being Successful and Sustainable
The responsibility of going public is the responsibility to be successful and sustainable.
Meet Brian and Ingrid Jahra, the husband and wife founding team of CinemaONE – a movie theatre exhibitor operating in Trinidad and Tobago. Months after listing on the Trinidad and Tobago Junior Stock Exchange, Brian and Ingrid discuss the importance of focusing on succession planning and business sustainability for their hundreds of new investors:
The key points to note here are:
- Business processes are key: Many SMEs lack well-defined policies and procedures which help the business enshrine what the founders thought were the elements that make the company successful and create the DNA of the company.
- Management team: Train the management team to become the faces of the brand as well to allow the founders to lead expansion into other areas. Important to integrate your management team into the business arena so that people reach out to them as well as the founders.
- Employees: Run your business with a great amount of transparency, approachability, and accessibility for your staff so that they feel like they are part of the vision and growth of the business and have a voice.
- Wider Shareholder Group/Community: IPO helps foster the need for sustainability through your accountability to your wider shareholder group and independent directors for guidance.
Public companies tend to have increased visibility, brand image, or public profile. This could attract a more diverse investor base, strategic partners, and/or customers.
Public companies are required to make various disclosures related to their business operations, competition, executive compensation, and customers as part of their public offering documents and for continuous disclosure purposes.
Further, shareholders and other stakeholders will scrutinize these disclosures, placing pressure on you and your management team. This can result in lengthier and less flexible decision-making processes as management attempts to undertake actions based on the expectations of these stakeholders.
Increased Recurring Costs
The recurring costs of being a public company include increased internal staffing costs and professional fees (e.g., higher regulatory, compliance, accounting, audit, or tax costs). Some of these costs relate to increased demands on your management team’s time to prepare ongoing required annual and quarterly filings.
Short-Termism in Shareholders
Most public company shareholders only invest for the short term and are interested in quick rises in the share price. This means that their focus would usually be on quarterly results and media commentary versus the long-range planning, and prospects for your company.
Typically, over 60% of a company’s value is related to cash flows expected three or more years in the future rather than its recent performance. Short-termism in shareholders results in the failure to consider your company’s:
- Potential future return from research & development (R&D),
- Long-term value of intellectual property assets, and
- Returns to be derived from investments intangible, capital assets.
Greater Access to Capital
A public company may have access to capital and future financing opportunities that are not available to private companies, for example, access to secondary equity financing through the ability to issue further shares.
A public company may also have access to financing on more favourable terms as compared to private investors.
Issuing shares also has benefits for a company’s balance sheet and debt-to-equity ratio, which may allow it to renegotiate existing debt for more favourable terms or obtain easier access to additional debt financing.
Going public will provide liquidity to your company’s founding team and shareholders, which enhances their wealth through the creation of a public market for their holdings. As your company continues to grow and scale, its publicly traded shares can potentially be used as a currency for acquisitions and future investments, which can further the company’s growth.
Public companies typically trade at higher valuation multiples than private companies as the greater disclosure of information reduces uncertainty around performance and increases value. Additionally, the enhanced marketability of the company’s shares makes them more attractive.
Future Capital Raises
As your company continues to be in expansion mode, you will need to revisit the investor markets from time to time to raise capital to fund your growth. In so doing, it is important to remember these two tips every time you are about to embark on a capital raise:
- Really understand your business – ensure that you understand accounting/finance as it is especially difficult to raise capital if you do not speak the language of business.
- Understand your investor market – for example, the general T&T market currently has more appetite for regular cash inflows through dividend payments than for patient, long-term capital appreciation. This also ties into our earlier discussion on shareholder short-termism.
The SME sector has been poised for growth for several years and is a strategic sector for numerous countries. The role that the capital markets play to seed economic growth is not only pivotal but vital.
While there are many benefits to listing on a stock exchange including greater access to capital to fund growth and innovation, market awareness, liquidity, and tax incentives, we must be soberly aware of the disclosure requirements, recurring costs, and the ups and downs your share price will experience as the public reacts to news and events.