Taking a company public through an Initial Public Offering (IPO) is a significant milestone. It is a decision that requires careful consideration and planning as it can have a profound impact on the company’s future.
There are many reasons why a company would want to go public depending on their circumstances. Considerations as to when a company should go public would depend on:
- Whether the company meets the regulatory requirements of the Financial Conduct Authority and stock market listing requirements.
- Whether the company is financially ready – Companies should have a strong financial background with consistent revenue growth, profitability, and a strong balance sheet.
- State of the financial market – Favourable market conditions such as a strong economy and higher investor confidence, can lead to better pricing and demand for shares during the IPO. Conversely, a volatile or bearish market may make it prudent to delay the offering until conditions improve.
- The competitive landscape – Going public at the right time can help the company gain a competitive advantage. For instance, if the company is in a rapidly evolving industry, being among the first to go public might be advantageous. Conversely, in a crowded market, waiting for differentiation or consolidation could be prudent.
- Investor demand – assessing investor demand is a key aspect of timing an IPO. A company can gauge the appetite of institutional and retail investors for their shares. Engaging with potential investors can also provide insights into the demand and valuation expectations.
- Exit strategy – Going public can serve an exit strategy for investors, founders or shareholders from the company.
What are the benefits of an IPO?
There are many reasons of taking a company public, the main reason for firms to undertake an IPO is to raise additional capital to improve cash flow, reduce debt or fund expansion or growth. Firms may also want new ideas and expertise from new investors.
- Access to capital – There is a larger pool of potential investors to raise capital from and the firm can raise equity finance at the time of the IPO and any time in the future after the IPO.
- Greater prospect of funding expansion through mergers and acquisitions.
- Bring fresh ideas to the management team.
- Provides a market for the company’s shares – A listing on the exchange market should make the company’s shares more marketable as the shares will be traded on a regulated and liquid market.
- Employee commitment – The company shares on an exchange market may encourage employees to participate in the ownership of the company through employee share ownership schemes
- Improve company reputation – Generally the listing of the firm’s shares on the exchange market should improve the firm’s financial stability and transparency. This should boost your company as a trustworthy and stable business to gain more customers and establish strategic partnerships.
What are the drawbacks of an IPO?
There are, however, some drawbacks for a company to consider before carrying out an IPO. The decision for a firm to carry out an initial public offering (IPO) is one that should not be taken lightly given the significant costs, both in terms of fees and the time involved in preparing for the IPO, and the burden of the increased regulatory obligations that come with being a listed company. There will also be increased scrutiny and external factors influencing the general market which are beyond the company’s control.
- Exposure to market conditions – External factors such as market conditions can impact the company’s share price.
- Potential loss of control – The sale of shares means selling a stake of the company which may result in management losing control of the firm as more people will have shared ownership of the company.
- Loss of privacy – As a listed company, the firm has greater accountability to its shareholders and therefore every management decision will need to be raised to all shareholders.
- Costs and fees – The costs and fees involved in carrying out the IPO, maintaining its listing and complying with the regulations and reporting requirements can be expensive and it may even outweigh the perceived benefits.
- More restrictions and regulations – A lot of time of the management team will need to be devoted away from actual business activities to managing the IPO process and fulfilling the ongoing obligations of a listed company.
- Risk to your share price and reputation – Even if you raise funds from the IPO, you may receive negative backlash from the market and the media which may damage the company’s reputation and negatively influence the share price.
As solicitors, we can provide advice on the legal aspects the IPO including advising on:
- Re-registering the company as a public company
- Company restructuring and reformation
- Appointing and removing directors
- Make changes and advise on the company’s constitutional documents
- Implanting appropriate corporate governance arrangements
- Amending and advising on the company’s prospectus
Deciding when to go public through an IPO is a complex decision that requires careful evaluation of different factors. Ultimately, the timing of an IPO should align with the company’s strategic goals and create value for its shareholders.
Monarch Solicitors specialist IPO solicitors provide a tailor-made approach to your needs and can assist with an IPO. Please get in touch with us by either calling 0330 127 8888 or emailing [email protected] for an initial consultation.
Monarch Solicitors is a leading UK law firm with specialist solicitors ready to offer their expertise. Our award-winning Manchester solicitors, London solicitors and Birmingham solicitors offer their legal expertise nationally and internationally.