Preparing for an IPO: A 6-Step Guide

In a previous article on DealRoom, we listed the most anticipated Initial Public Offerings (IPOs) of 2021. But not all public listings are high profile.

For example, in the US, there are estimated to be a total of over 5,000 stock indices that cater to everything from small cap regional firms, many of which you’ll likely never come into contact with, all the way up to the blue chip companies listing on Nasdaq, NYSE and the Dow Jones.

What’s the attraction?

Well, probably the factor which links all of those companies in their desire to obtain a public listing, is that they want to raise capital.

Secondary issues usually include owners’ desires to divest some or all of their ownership when there’s no liquid private market for the company, the ability to gain greater exposure for the company and its goods or services, and as always, there may be an element of management hubris somewhere in the mix.

If you’re considering an IPO, be aware that it’s a time-consuming, expensive and challenging process.

Many companies have used "DealRoom for IPOs" and we can confirm from first-hand experience that the document load in the lead-up to an IPO exceeds almost any M&A transaction.

That being said, a well-managed IPO can be the start of great things for companies of any size, so read on for this brief primer on how to prepare for one.

In broad terms, there are two motivations behind an IPO:

• to raise growth capital to allow the company to fund its ambitions,
• and to provide the company’s founders and early stage investors by selling them to investors on the equity market where the company elects to list.

An IPO is a complex process that can take several years in pre-planning and has been estimated to cost at least a million dollars (which companies hope to make back after the listing).

There are also several tasks to fulfill before it can take place, which is the focus of this article.

IPO preparation process

1. Develop a Strong Understanding of Your Index

Any equity index comes with its own requirements. There will be common themes, such as audited financial statements, but there are specific costs, disclosures, corporate governance requirements and more associated with each individual index.

Understand these before beginning the process at all. It will help you choose which index suits your company best and save you from missing something important when you’re already some way into the process.

Check also

Due diligence checklist for IPO

2. Put Together Your IPO Team

A good team is as important for an IPO as it is for due diligence. You’ll need top notch accountants, legal experts, underwriters and probably some outside advisors specialized in IPOs before beginning the process.

A good place to start is with the experts on IPOs, who can talk you through the process, helping you understand who is going to be needed and when. And of course, that leads us to....

3. Construct a Board of Directors

If your company was just about to make a transformative change in strategy, which could make or break its future, who would you go to for a second opinion on the strategy?

That’s the question you should be asking yourself when thinking about board members. These should include a mix of industry veterans with financial, operational, and strategy experience. Look especially for their accomplishments in the near past and sound them out about your ideas for the direction of your company to see if they’re a strategic fit.  

4. Get the Timing Right

Timing, just as with mergers and acquisitions, is all important for IPOs. But be cognizant that there are two aspects to timing: external and internal. The market may be at the right moment, with liquidity abound, but your company may not be. The reverse is also true.

Experts in IPOS tend to believe that IPO being ‘internally’ ready is more important than the market, but there’s no rush here - mess up the IPO and you could do more damage than good.

5. Preparing the Roadshow

Why would anyone want to invest in your company?

That’s what underpins all of this. It’s also the message you have to craft for the investor roadshow, when you’ll be looking to appeal to a broad spectrum of investors and provide them with all kinds of extra support you probably didn’t envision at the start of the IPO process.

A good tip here is to ‘underpromise and over-deliver’: People don’t like nasty surprises further down the road, so keep it upbeat but don’t exaggerate your company’s growth prospects or it will come back to haunt you.

6. Ongoing Communication

Regardless of the size of your company, the role of investment analysts can be crucial, both before and after the IPO process. Establishing and maintaining good relationships with these analysts can be the difference between there being steady ongoing demand for your company’s stock and there being no liquidity at all in your equity.

Be communicative and helpful whenever they come calling. Good relations with analysts can generate significant long-term value for listed companies.

IPO readiness checklist

There are several questions that anybody undertaking an IPO can ask to assess their readiness for this process:

• What is the motive behind your company’s IPO?
• Is there a more cost effective way of raising this capital?
• Is a direct listing possible?
• Is the market at the right point of its cycle for an IPO?
• What valuation are you hoping to achieve at the IPO and is this realistic?
• What are different investment banks advising about the process?
• What criteria are we using to choose an investment bank to underwrite the IPO?
• How long will this process take, from start to finish?
• How much is it going to cost with advisory fees and internal restructuring?
• Are there any red flags in our recent past that can compromise this process?

How to ipo your company

After all the preparations and groundwork has been laid out for an IPO, a date is set. If the company is a ‘unicorn’ - i.e. it has been given a valuation of over $1B - the chances are that the date will be eagerly awaited by the investment community and receive ample reportage in the press.

Most IPOs go relatively unnoticed, however, with the assumption being that they’ll just tread water on their chosen index.

Before the stock goes live to the general public, the index will usually fill orders for a few hours. These are typically funds, hedge funds, and institutional investors, who were convinced by the underwriters to invest in the stock at its IPO.

This should bring it somewhere near to the valuation that the investment bank (and underwriter) gave the stock in advance of its listing.

Ultimately, this is only ever an informed estimate.

A few hours after trading stocks to the ‘big fish’, the company opens its stock to the general public.

If demand for the stock doesn’t reach its supply, the stock is described as ‘undersubscribed’ and the underwriter will be forced to sell the stock at a discount.

If the opposite happens, the stock is ‘oversubscribed’, meaning the valuation could have been set higher, allowing the company to generate more from the IPO.

Conclusion

We advise that you think long and hard before opting for an IPO.

It can be a highly worthwhile process, but we’ve also seen companies that get caught on an IPO merry-go-round - listing one year, going private the next, and then repeating steps one and two over and over - a fruitless exercise that might be avoided with better long-term planning.

If you do decide that an IPO is the best next step for your company, talk to us at DealRoom about how our virtual data rooms can enhance the process for you and your company.