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Introduction
Your company is on the rise, but you’ve taken it as far as you can go as a private entity. To reach your full potential, you consider an IPO as your next step. But is your business prepared to operate effectively as a public company?
Successful IPO candidates will begin the transformation process well in advance of the public launch. Data shows that one of the most prevalent traits of IPO market outperformers is lead time allocated to preparedness. Companies that exceeded overall market returns following an IPO have typically implemented critical organizational changes to begin acting like a public company a full 6 to 24 months prior to going public.
In the Planning phase, the main aspects to be covered are (i) IPO Structure and main features; (ii) Eligibility criteria; and (iii) Appointment of Advisors. The following sub-chapters will cover each one of these (click on the diagram to fast-travel to any specific caption).
IPO Structure and main features
Strategic Options
After pondering and evaluating alternatives, does IPO come up as the right strategy to achieve your goals?
While an IPO may be your favored approach to raising capital, it’s still important to evaluate all possible transactions that could serve as attractive alternatives to a public listing in the context of shareholder and corporate objectives.
A detailed evaluation of the suitability and viability of M&A, a private equity investment or other, as an alternative to IPO, should always form part of the process of determining whether to pursue an IPO.
These alternatives and a comparative analysis between them is available in [X-Ref to the table presented in Chapter 2]
Given the range of potential alternative transactions, you need to have a clear idea of what’s involved, how long the process will take, what it’s likely to cost and whether two or more routes need to be run in parallel.
What are the different ways of listing?
The different ways for a company to reach trading on a stock market are the following:
INITIAL LISTING
After the dispersion of capital, through offers, the listing of the shares on the stock exchange is the second step.
Initial Public Offer
A public offering corresponds to the initial offer of a privately owned company’s new (capital raise) and/or existing shares to the general public.
In general terms, public offers of securities are addressed, wholly or partially, to unidentified recipients.
This type of offer typically requires the preparation and publication of a prospectus approved by the financial regulator.
While it enhances the company’ image and credibility, a public offer also implies further requirements and obligations.
Private Placement
A private placement is an offering where new and/or existing shares are offered directly to institutional investors. It is a way to raise capital for non-listed companies that want to avoid the complexities of a public offering.
The offer may be performed along with an initial listing. In this case, an approved prospectus is not required unless the company intends to list on the regulated market. The company will only need to prepare an Information document.
While commonly faster and less cumbersome, a private offer may result in lower visibility and liquidity.
Direct Listing
With a direct listing, shares are simply made available for trading (without an IPO or a private placement). An approved prospectus is not necessary unless the company intends to list on a regulated market.
TIP :
Under a public offer for subscription, investors acquire shares that are newly issued as part of capital increase and the issuer receives the proceeds of the offer.
Under a public offer for sale, the company’s owners put up for sale a number of shares and the shareholders receive the proceeds of the offer.
It’s worth highlight that in the same offer you may decide to both offer shares newly issued and pre-existing shares. This way you may assure the funding required for the business, as well as liquidity for the existing shareholders.
IPO Readiness Assessment
Companies can save time and costs, and reduce uncertainties, by adopting a structured approach to the planning of the offering and listing process. During this initial planning phase, companies should become aware of the requirements to which they will be subject as a public company, during and following an IPO. Going public requires management to be prepared to meet shareholders and market expectations from the very beginning, which includes addressing ongoing compliance and regulatory requirements, operational effectiveness, risk management and periodic reporting.
Prior to any IPO, it is recommended that the IPO readiness of the company is assessed by the executive team (with the help of specialized advisors) to preemptively maximize the probability of a smooth and successful operation. The IPO Readiness Assessment is an essential exercise before kicking-off the IPO process, designed to guide all companies intending to go public, to check if they are suited to embark on such process. It helps companies to identify and resolve potential business, operational or financial problems and to assess how to commit suitable resources to meet the process requirements.
Are you prepared?
Once you decided to go public, you will need to map out all the necessary steps. Advance preparation and planning are critical. IPO readiness and internal preparation are of paramount importance. Being ready to kick-start execution when the IPO window of opportunity opens may require implementing change throughout the business, organization and the corporate culture.
What are the objectives of an IPO Readiness Assessment?
It is designed to guide the company through a successful transformation from private to public status. Executives also want to understand more of the “measures that matter” — what it takes to win in the capital markets.
What is the scope and process of the IPO readiness assessment?
The IPO readiness assessment typically starts with a workshop covering all areas specific to the IPO case: strategy, structures, taxes, financials, internal systems, functions, leadership and the planned timeline. In this process it should be identified and discussed any gaps that need closing on your IPO value journey. You may also discuss strategic funding considerations and develop an initial target structure and IPO base case in line with your objectives. This assessment can include discussions on the matters presented in the box below.
Ultimately, you should be able to define the strategy of your IPO, present the gaps between your current status and IPO target ready status, and define work streams and a road map. You should also estimate the timelines and the resources required to fill the gaps and achieve IPO readiness. Specialized advisors may help you on this subject.
Perceived values of conducting an IPO readiness assessment include:
| ICON | Cost saving by having transparency on how to get ready for an IPO In an integrated approach, this assessment helps companies and their managers to define what organizational changes are required prior to an offering. |
| ICON | Time saving by getting valuable insights in IPO leading practices An IPO readiness test helps companies to decide which options best fit their business strategies and objectives and helps them to build the road map for getting IPO ready. |
| ICON | Raises certainty in transactions taking place on unpredictable IPO markets The right team, equity story, timing and pricing are vital to success. Efficiently achieving readiness will allow the IPO process to occur in a structured way and will help ensure a strong debut in the capital markets and the maximization of the transaction value. |
TIP:
Experience shows that “best in class” companies that go through an IPO process, usually implement internal processes that are “public company like” before going through the offering process, e.g. putting in place adequate reporting systems and governance structure.
This exercise highlights areas that may need attention, and enable the company to mitigate risks in the early stages of the process.
***Pre-IPO enhancement***
Have you evaluated which pre-IPO transactions could enhance the offering’s value?
Most companies undertake pre-IPO strategic transactions, which are powerful tools for accelerating the development of your business.
A successful business alliance or M&A can help you achieve critical mass and also support your growth story. If a company can demonstrate that a successful joint venture partnership or acquisition has already been completed and integrated, it adds credibility to a company’s growth plans. Investors may be more skeptical of IPO candidates that have not demonstrated successful pre-IPO transactions where an acquisition strategy forms part of the post-IPO growth story.
The possible benefits of pre-IPO transactions:
► Facilitate growth, such as expanding into new markets;
► Strengthen the business;
► Increase company revenues;
► Offer scale to the listing;
► Provide a platform for operations, management and financial reporting;
► Increase credibility with market analysts and investors.
***IPO Destination***
Have you chosen the right stock exchange and listing option?
Selecting the right capital market, stock exchange and listing segment enables you to determine the regulatory requirements that your company will have to meet. In the run-up to going public, the company’s internal structures have to be checked and prepared for the relevant requirements. These measures are essential to maintain the profile of a listed company and meet the requirements of investors and regulators. The first key steps in this phase involve determining the appropriate capital market strategy and achieving internal capital market capability.
Global IPO trends [source: EY Global] show that on a long-term average more than 90% of issuers list on their domestic stock exchanges, although they may sell shares abroad simultaneously.
It is recommended that the company develops a destination assessment to support a structured way to assess these factors, from different IPO stakeholder perspectives.
[IPO destination compass: considerations when deciding where to list]
***IPO Strategy***
Do you have an alternative financing strategy to execute instead of an IPO?
It is difficult to guarantee that equity market conditions will be right once the preparation is complete.
If capital markets are volatile with falling valuations and the company can afford to wait, it may elect to hold off until the markets improve. It is advisable that you have the flexibility to execute alternate financing strategies, in case the IPO window closes during the process or needs to be delayed. In the meantime, if funds raised from other sources can be used to increase the company’s growth potential, the value of the company may rise. A dual or a multitrack approach allows to keep options open during the preparation process.
How can you prepare and run a multitrack process?
Preparing for an IPO can also help the strategic sale process. Gearing up for an IPO and preparing for alternative equity funding sources involve many of the same preparation activities. There is a very high correlation in relation to the value drivers for both. It is recommended to evaluate what the company would be worth if it were to be sold to a strategic or financial buyer and what the stock price would be worth in an IPO.
A company that is properly prepared for an IPO should be better placed in relation to other transaction alternatives. The business will have been taken through a similar process with all the rigors of a public offering such as the right management structures and strong corporate governance.
Since there is considerable overlap in the preparation required for the various routes, a dual- or multitrack approach can be executed without necessarily doubling or tripling your costs. By diversifying the approach, the company can significantly increase its strategic options and negotiating leverage while reducing execution risk.
What are the requirements of a multitrack process?
The IPO and sales process to a financial or strategic investor have unique features. But they also have common requirements, which can make a multitrack process more efficient. The first common factor is the equity story. Any investor — whether strategic, financial or retail — will want to understand why they should invest in the business. For example, is the company offering growth or yield? Is future growth going to be organic or via acquisitions? A second shared requirement is the financial information presented. In any type of equity funding operations, there must be one core set of data prepared on an adjusted basis, in order to present the business in a consistent and comparable way.
***IPO internal project resourcing***
Is the management team experienced?
Building a powerful team starts at the top, with the right executive team and appropriate incentives functioning well before the IPO. Data shows [souce: EY Global] that for the vast majority of institutional investors, quality of management was the single most important non-financial factor when evaluating a new offering.
People are what make or break great companies. Investors often say they back the people not the plan. The right management team must be in place before the IPO.
Your internal IPO project management team must be able to work well together and have the experience, skills and incentives to undertake the IPO transaction and effectively operate a public company.
***Corporate governance***
Has your company created the corporate governance policies that inspire shareholder confidence?
With greater scrutiny and liability for public company directors, substantial time and effort is required to identify and implement the appropriate corporate governance principles and reporting policies that protect shareholders’ interests and enhance the company’s value. This will involve working with your legal counsel on all corporate governance matters, including a closer involvement of Board members, an effective supervisory oversight of the risk management processes, an efficient pre-and post-IPO legal and compliance structures. Now more than ever, a good corporate governance, including an adequate balance of qualified and diverse board members, a strong supervision body, appropriate policies and practices, transparency of related-party transactions, is critical, and is increasingly required by stakeholders from all companies, not only from listed companies.
What are the most challenging corporate governance issues your company needs to address in the IPO process?
Enhancing internal controls can help you meet changing accounting, tax, legal and procedural requirements. Historically, the top two reported internal control deficiencies contributing to a material weakness were related to the competency and training of accounting resources and inadequate accounting documentation, policy or procedures. Dealing with such significant accounting issues early is a critical success factor to an IPO.
Under public scrutiny, companies must create a sensible management compensation structure that maximize the company’s profitability while rewarding high-quality managers for reaching goals and providing adequate incentive for management to drive the business forward.
Moreover, changes to management or the board of directors may often be part of the IPO. Amendments to existing or establishment of new annual incentive plans may therefore be relevant. Such incentive plans must be based on key drivers and measures for increasing shareholder value on a short-term and/or long-term basis. Furthermore, incentive plans can also be an important part to help ensure retention of existing key personnel.
Once the IPO is completed and the company has publicly traded stock, an employee stock option plan can be a highly attractive part of the company’s executive compensation package.
Implementing board meeting and reporting processes is a necessary formality. Your company needs to set board meeting guidelines and internal regulations. For instance, certain issues and decisions should be reserved as the domain only of the board and not of any other part of the business. This needs to be circulated and agreed upon by both management and board members.
***Tax Considerations***
Why does tax planning need to be a priority throughout the IPO process?
When it comes to designing its new legal and tax structure, each company undergoing an IPO will have different needs and priorities. There is no one-size-fits-all solution, but there are a number of key areas that all companies must consider. An IPO has tax implications with a need to undertake extensive tax due diligence to identify any exposure (both past and future).
The existing shareholders of an organization looking to go public view the process as a natural expansion and growth in activities. They are therefore amazed by a myriad of taxation implications, risks and also opportunities that can arise throughout the process.
In this process it is important to help ensure that tax assets, such as tax losses carryforward, are not lost, and that the steps taken during reorganization do not trigger transfer taxes (such as real estate transfer tax), capital duty or stamp duty.
Restructures to simplify or optimize the current corporate structure, spin-off of activities or other initiatives to prepare the company for the IPO will often be required (for example changes to or increases in share capital). Such restructures or changes must be carefully considered as they can have significant tax impact on the company or its shareholders. Furthermore, such restructures or changes can be time consuming and therefore need to be identified early in the process to help ensure that they can be implemented prior to the IPO.
The tax implications and/or opportunities may often require a thorough assessment and sometimes lead to reorganization or implementation of initiatives for the shareholders. In some cases, it can change the way in which commercial transactions are approached by the shareholders and thereby have an impact on the IPO process.
In addition, to assure the company´s incentive plans will have the desired outcome, their tax implication should also be assessed.
***Finance function***
Look at your company’s finance organization through the lens of the public markets
Becoming a public company requires a significant shift in focus for the finance function. There is a need for more external reporting and expanded disclosures, and possibly a need to change the accounting reporting standards used. This means there is a need for strong competencies in accounting, financial disclosures and financial controls, as well as corporate governance, budgeting and forecasting, investor relations (IR), treasury, internal controls and compliance to address the financial demands associated with a new regulatory, marketing and strategic environment.
The organization of the finance function is a key priority as they need to prepare and deliver financial information to multiple stakeholders. Areas of change could include the accounting standards used to report the financial statements, the frequency of reporting, i.e., half-year reporting, the speed of financial close, new and expanded financial disclosures and financial guidance to investors and analysts. As the company develops a plan to embark on its IPO journey and address the challenges, the following aspects should be take into consideration:
► Does your finance team have the mix of skills required?
► Are accounting policies and procedures documented and appropriately distributed?
► Is the segment reporting for public disclosure aligned with the equity story and the way management runs the company?
► Have auditor independence issues been resolved? Have audit schedules and processes been established to align with the IPO timeline and support the relevant regulator’s requirements?
***Internal controls and compliance***
Have financial, accounting, tax, operational and IT processes, systems and controls been assessed?
Extensive testing of internal control systems has become a way of life for public companies. An effective risk-taking culture can only thrive within a solid framework of cost-effective internal controls. Market leaders are developing methodologies for preventing and detecting fraud. They are also anticipating the increased risks created by increased regulation (e.g., tax or climate change) and broadening the scope of their risk management practices to include new areas, such as third-party and counterparty risk.
Adaptable IT systems facilitate financial analysis and reporting. IT will be critical to helping your public company capture, organize and assess relevant business information quickly and easily, thus enabling swift financial analysis and reporting. Your management should assess whether the current IT environment and infrastructure are aligned with the company’s business objectives. As high-growth companies are in constant flux, your information systems must support a work environment of adaptability, innovation and collaboration.
How should your company reassess its risk management?
Prior to going public, a company must fully understand the impact its new stakeholders will have on risk and compliance. These stakeholders may include independent directors, auditors, regulators, analysts and investors. In particular, regulators and investors react negatively to surprises. Effective risk and compliance management processes can significantly reduce the risks arising from such surprises.
Risk assessment should be an ongoing, systematic process to identify and evaluate any possible future events — whether within the organization or in its external environment — that have the potential to affect the organization’s ability to meet its objectives.
Effective risk management is the product of organizational strengths in a number of important areas, for example the company’s ability to:
► Manage expectations — positive and negative surprises — to investors, analysts and regulators;
► Set and fulfill realistic and sustainable financial goals;
► Anticipate and address regulatory changes and business risks, in an efficient and timely manner. Additionally, the ability of the management to communicate the company’s risk management policies and processes is just as important as the quality of the company’s corporate governance, including its approach to compliance issues.
Companies considering going public often carry out a thorough benchmarking of their risk identification and mitigation processes against their listed peers as well as the reports of industry experts. The company’s risk mitigation plan should be carefully deliberated and tested to make sure that it can withstand the scrutiny of investors, analysts and regulators.
***Maintenance of control***
Does an IPO affect the current shareholders control?
Shareholders don’t need to renounce to the company’s control to become public. In fact, even in the case shareholders want to sell more than 50% of the company, there are still measures that may defend the controlling position over the company.
The following are measures, among others, that may help current shareholders maintaining control:
Plurality voting shares – the Securities Code allows for the issuance of shares with special plural voting rights, up to a limit of 5 votes per share. This is perhaps the most appropriate solution for companies that wish to admit their shares to trading on a regulated market or multilateral trading facility and are concerned about losing control of their shares, without the significant risks associated with non-voting preferred shares.
Non-voting preferred shares – shares that do not have voting rights, but confer its holder special rights, namely a priority dividend and the right to priority reimbursement of its nominal value in the liquidation of the company. Non-voting preferred shares allow capturing financing without change the controlling shareholder structure of the company. However, they carry an increased risk in their use, since if the priority dividend is not paid in full during two consecutive fiscal years, these shares grant their holders voting rights on the same terms as ordinary shares.
Eligibility criteria
You should have to consider the eligibility criteria of the markets your company is considering listing its shares.
The listing and trading on the existing Portuguese markets – Euronext, Euronext Access, Euronext Access+, Euronext Growth – is subject to preliminary requirements, which are established/ruled by:
► The Securities Code and/or EU Regulations;
► The Securities Market and Exchange Commission (CMVM) approved regulations;
► The Euronext Rule Books.
Requirements for admission on each market are shown below:
Issuer
Offered securities
Offer process
Financial information
Appointment of advisors
Do you know who to ask for assistance?
Besides the company’s management, advisors will also have a crucial role in the IPO process, by guaranteeing all the documentation for the IPO is accurate and properly prepared, ensuring all the eligibility criteria is fulfilled, managing the marketing and sale of the company’s shares to investors, and spending significant time analysing how to ‘‘position’’ the company to achieve a successful offering. Therefore, an experienced and motivated team will increase the likelihood of an orderly and professional offering process and a positive reception from investors.
What factors should companies consider when selecting advisors?
| 1 | Track Record Has the advisor been involved in successful IPO processes? Does the legal advisor hold strong knowledge and practice in capital markets and industry specific legislation and regulation? |
| 2 | Reputation and Experience Can the advisor provide special insights, advice, and research on the industry? Does the advisor have strong relationships with investors from the company’s industry? Is the advisor perceived as credible by the capital markets? |
| 3 | Analyst Coverage Do research analysts cover the industry and comparable companies? |
| 4 | Distribution Strength Does the advisor have solid distribution capabilities with retail and institutional investors? How effective is its retail sales force and its institutional sales force? Can the advisor reach regional, national or international? |
| 5 | Commitment to the Company Will the advisor make the company’s offering a priority? |
| 6 | Aftermarket Support Will the advisor continue to advise the company as a public company and, when applicable, present it to potential investors? |
The Company must dialogue with potential advisor candidates to measure how well they understand both the capital markets environment, the company and its respective industry, and the aspects that investors will focus on in deciding whether to invest. To better decide between potential advisors, companies may test their knowledge regarding:
► Company’s comparables;
► The legal advisor should hold past experience in capital markets and industry specific legislation and regulation;
► How the company’s expected valuation compares to the comparables’ valuation;
► Recent offerings have occurred in the company’s industry or regarding companies with similar size;
► To what extent the pricing of the company’s share will depend on historical earnings, future earnings projections, revenue trends and other factors;
► The pros and cons of each markets segment to request admission to;
► What are the main steps the company needs to take prior to the IPO and how can the advisor help you.
TIP:
Advisors will certainly not want to commit significant time and resources if they are not confident that the offering will be successfully completed. The number of the advisors approached depends partly on the attractiveness of your offering. If it is large and likely to attract larger firms, you may decide to approach three or four financial intermediaries. It is important, though, to inform potential advisors that you are approaching others and to provide details about all features of your company and offering. If the offering is attractive, advisors will examine your company and sell their services to you.
