How to keep your company prepared for IPO?
Before talking about how to be prepared for IPO - Initial Public offering and Listing in a stock exchange, let’s talk about why you should look for IPO or public listing of your company, but even before that you need to assess whether your business is investible.
IPO worthy Check: -
It is a common saying that every business is not an investible business, that means every business may not be considered by investors as attractive. This is because of a simple reason the business is not an “SUV” which stands for: -
Scalable here means a company's ability to grow without being hampered by its structure or available resources when faced with increased demand for example a software once produced can be sold to any number of customers or a segment of customers without investing much on manpower for further development.
Unique here means
Viable here means whether the business is sustainable under various economic situation, whether it can remain profitable even during economic slump and whether it can operate even without its promoters at the helm like an ecommerce website which can generate orders and fulfil orders automatically through series of structured instructions is a viable business even during massive lockdowns imposed by government.
Let’s look at the advantages and disadvantages of IPO
Now from the above assessment, if your business is SUV, then investors will definitely be interested to be partners in success of your business. There are various ways to raise investment for your company like angel investors, Venture Capital funds, private equity funds, however the pinnacle is raising investment through IPO. IPOs are popular because they are “SERVIC”. It stands for
Succession - No better way to retire from your business than handing over the operations to a seasoned professional management team. Public listing entails instituting an independent professional team at the board which oversees the business operation along with Chairman, Audit Committee, CEO and other key management personnel.
Expansion - With public funding the company will have deeper pockets and can expand into new product or services lines through research and development or acquire companies with competencies.
Retention - Employee retention is key the success of any organisation, no single person can be responsible to the success of a company. Employees can unlock the true value of Stock options when the company lists in stock exchange.
Valuation - Promoters usually rely on profits that the company generates however capital appreciation of their business gets unlocked through an IPO. This can be far significant portion than the profits that the business generates. In current scenarios, listed companies have an average Price Earnings ratio of 21 times that is 21 times the net profit.
Investment - The most important reason why companies go for IPO is obviously to raise funds. Since equity investments are on returnable it doesn't create any burden on the company.
Credibility - Lastly listed companies gain better visibility in public forum compared to peers and because listed companies have to comply with rigorous governance regime also can demand a premium from its customers, as the customers now trust the company more.
Challenges of ongoing for IPO: -
Now that you are interested in going for IPO, its necessary that you also understand the challenges
Regulations - As a public company the organisation has to embrace compliance with stringent regulatory requirements. Apart from complying with Companies Act, Labour Laws, Taxation Laws, the company now must be prepared to much more stricter guidelines as per Listing agreement with Stock Exchange and SEBI. The company must be willing to invest into systems and manpower to ensure adherence with all the regulations
Autonomy - As business promoter, you enjoy the liberty of being a boss. Which means you would like to run the company according to your terms. However, if you intend to go public via IPO, it is mandatory to adopt highest level of corporate governance which means you need to add layers of independent oversight within the organisation. These can be having Independent Board of Directors, an Audit committee and Internal audit wing, etc. This would mean that the promoter is now answerable to higher authorities and would lose autonomy.
Cost - The cost of IPO is predatory. The costs involve hiring a merchant banker, preparing project reports, hiring CEO, CFO, performing due diligence, public relation, and media publishing. It can cost 10-12% of the IPO which must be paid upfront.
How to get ready for IPO?
Appointing professional management - to get a better valuation, the company needs to boast about its team strength, resource optimization and economies of scale. This is usually possible by adding professional management team at various levels. Recommended levels/ positions are
- Board of Directors
- Audit committee
- Chief Executive Officer (CEO)
- Chief Financial Officer (CFO)
- Chief Operating Officer (COO)
Due diligence - As discussed earlier, compliance with regulations is critical for successful IPO, hence this culture of zero tolerance for non-compliance has to be instituted by the company. As a preliminary step, the company needs to appoint an independent auditor to perform thorough due diligence to identify if company has failed to comply with any regulations. After this compliance lapses need to be corrected by the organization.
Financial Reporting - The company needs to implement real time accounting systems to enable accurate and timely reporting of financial information. This can be done through.
- Implementing ERP software so that data flows to finance department automatically
- Periodical Review through internal audit team
- Robotic process automation to avoid clerical errors
- Vendor management software to avoid duplication and quick process
Business intelligence software to generate dashboards tracking
- Segmental Revenue
- Segmental KPI
- Budget vs Actuals
Advisory body - Last but not the least about a set of financial advisors like Investment bankers, Chartered Accountants, Domain experts, Influencers who can guide the company through the challenges of IPO listing process.
“Information contained herein is for informational purposes only and should not be used in deciding any particular case. The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts have been made to provide authentic information, it is suggested that to have better understanding and obtaining professional advice after thorough examination of particular situation.”