This article was written for Director of Finance
Although IPOs on the London markets have been few and far between in 2009, there has been an increasing number of secondary fundraisings in recent months and other indications that capital markets are starting to reopen.
Given the lead time involved in getting prepared for a flotation, aspiring companies should address key preliminary considerations now to put themselves in a better position to achieve a successful flotation in 2010.
Know why you want to float
It is paramount to have acceptable reasons for wanting to float and raise public funds – typically these include access to additional development or working capital to execute on a value-delivering strategy.
New investors are not however generally amenable to letting existing investors exit completely in cash and will often expect debt holders to convert to shares.
The preparation of a proper business plan will be a crucial first step in setting out your vision for investors.
Appoint the right advisers
You will require at a minimum a financial adviser, broker, reporting accountants and solicitors. Do choose advisers who not only are sufficiently experienced but with whom you feel you will get on well with as relationships are very important – you will be spending a lot of time together so personalities will be key.
Don’t underestimate the extent of due diligence and documentation
Accept that a flotation will take a minimum of 3 months but that more likely it could be 6 months or more. No company is perfectly organised so be as open as possible about any due diligence problems or gaps in documentation as they will undoubtedly come out eventually – you can save time and expense at the outset by explaining the position.
In order to minimise disruption to your business, appoint a point person to coordinate all requests for documentation and ensure that key iterations of documentation are read by the directors on an ongoing basis rather than cramming hundreds of pages in the night before the completion meeting!
Allow time for reorganisation and restructuring
Do recognise that some form of reorganisation of restructuring is generally required in advance of floating you business. For a start the company will need to be re-registered as a plc, which for a pre-revenue business or one with historical losses may not be possible without putting a new holding structure in place.
Investors will expect a simple capital structure with only one class of share so you will need to rectify any more complex structures in advance. A further rule of thumb is that investors will generally not be happy with convertible securities such as options and warrants representing more than 10% of your enlarged share capital on flotation.
You may want to allow time to get a tax-efficient share option scheme in place, which requires HMRC consent.
Ensure appropriate management is in place
Your board will need to consist of a CEO and suitably qualified CFO plus two suitably qualified non-executives, who will typically have relevant quoted company experience and one with relevant industry sector experience.
Getting good non-executives on board can take time though your advisers can usually provide good recommendations.
Understand the accounting and financial reporting requirements
The finance director’s role will be crucial to the flotation process, controlling the preparation of the financial due diligence, financial model for working capital purposes and implementing financial reporting procedures.
The flotation timetable is often driven by the requirement for audited accounts no more than 9 months out of date, or interim accounts will be necessary which can increase time cost.
You will also need to consider issues of IFRS restatement/reconciliation of historical financial information, particularly for any foreign subsidiaries.
Get off to a good start as a publicly quoted company
Don’t be too aggressive with valuation expectations – leave something on the table for investors as you will need their support down the road. Achieving the first set of market expectations is crucial to maintaining confidence and your share price, so it is infinitely better to under-promise and over-deliver than the reverse!
A company which is well-organised and has given consideration to these matters prior to embarking on the floatation process will make a much better impression with advisers and the investment community, thus enhancing the prospects of a successful, and IPO.
You can register online or follow us on Twitter or LinkedIn to receive our latest news, events and publications.