Last year was a good year for initial public offerings (IPOs), as many tech start-ups which were valued at over $1bn (known as unicorns), including Uber, tried going public with differing levels of success.
Private companies can decide to go public by offering shares of their company on the stock market, to be bought by anyone. Each person who buys a share owns a small stake in the company – majority shareholders being the most powerful in the business.
Going public is not always the best option for businesses. Tech unicorns such as Lyft, Uber, and most notably WeWork, have seen a drop in share price – and therefore valuation – since their IPOs. This caused concern that the integrity and efficiency of the market is being hindered by the popularity of investing in cash-burning companies with fast, unsustainable growth.
Given the fluctuations in the stock market, businesses need to ensure they schedule a floatation at a time when the market is strong. Companies need to be financially prepared so they don’t miss their chance.
Companies are increasingly using an alternative method of taking their company public: a direct public offering (DPO), also known as a directly placement. Spotify, for example, took the direct listing path in 2018 and Airbnb is reportedly considering the same route for 2020.
A compelling business case is essential for a company preparing for the stock market. Obvious reasons for going public are to gain access to capital markets, raising additional capital, and rewarding employees with equity-based incentive compensation. Another incentive to go public is to offer your early stakeholders liquidity and the chance to realise a return on their original investment, which grew the business.
Preparing your company to go public
Business bosses should ensure the firm is generating enough profit and demonstrating future growth before going public; they must be confident the company is mature enough, and ready for the responsibility of financial transparency. Finance professionals within a business must ensure the company is financially ready to go public, as it’s a massive step and creates very different reporting standards and expectations.
Before the process begins, your company needs to consistently close its quarterly statements on time, as it will be good practise for when its finances become more transparent. At the beginning, all companies find this to be a challenge, but it may highlight your need for additional staff for reporting, internal controls, or other areas related to financial planning and analysis.
Within your team, investor relations (IR) is an important factor to consider when preparing. You should decide early whether you need to hire an IR executive to your investor relations team or use an IR consultancy.
The first step is to have your financial records ready to be scrutinised by rigorous auditing under the Financial Conduct Authority (FCA) regulations in the UK - a company should be profitable on an EBITDA basis (earnings before interest, taxes, depreciation and amortisation).
Finance professionals need to have realistic expectations for their valuation. The valuations of other companies in the public equity market may impact that of yours. Market conditions at the time of your public offering can also have an effect.
Would a DPO make sense for your company?
With direct listings, there is no need for underwriters, stock brokers, or investment bankers, which can save a company a fortune. Businesses sell existing shares of the company instead of raising money for new ones.
It would be worth taking the risk of bypassing underwriting if companies have enough cash-flow and can promote the sale of their own stocks – with an added benefit of not having a lock-up period. This refers to a period of about 180 days where your shares are not allowed to be sold yet; DPOs do not have this restriction.
After the preparation for an IPO or direct listing begins, it becomes more apparent if companies are facing problems with their financial accounting – be sure to conduct internal audits beforehand, to identify and solve any issues early.
Another risk is that your existing investors may not want to sell their shares, creating a lack of liquidity.
Overall, direct listings and initial public offerings are lucrative opportunities to grow your business – if you are properly prepared for the process. This is a huge responsibility for any finance team.
To find the best accountancy and finance talent for your business, or to find your next finance opportunity, visit your nearest REED office.