The IPO journey for family businesses
Taking a family business public through an Initial Public Offering (IPO) is a significant milestone that requires strategic planning and careful execution. The transition can unlock new opportunities for growth, but also brings challenges brought by increased scrutiny, regulatory requirements and stakeholder expectations.
In an IPO, a private company becomes a publicly traded entity, offering its shares to the public through a stock exchange. This transition from private to public status is marked by the issuance of new equity shares to institutional and retail investors, expanding the company’s ownership base. This may not be appealing for some family businesses, as it may dilute the family’s ownership and even run the risk of losing control.
Looking at it from a different perspective, an IPO lets family owners realize previously unmeasured value of their companies with the opportunity to cash in through secondary offer during the IPO or later on subject to lockup restrictions. On the other hand, the public will now have a chance to invest in what it used to be a private company with hopes of future capital gains or dividend payouts. For the company going public, it is an important step in accessing significant long-term capital that can fund expansion programs or new strategic investments that bank creditors or private investors may not be able to provide.
KNOWING WHEN TO DO THE IPO
In the 2023 EY Global IPO Trends Report, the ASEAN IPO market was generally challenging, with high inflation rates and elevated interest rates reducing IPO activities for most countries in ASEAN. In the Philippines, there were only three IPOs, all completed in the first half of 2023. Globally, moderating inflation rates and interest rate cuts could attract investors back to IPOs. Locally, a good number of IPO transactions are expected this year due to strong economic fundamentals, but the government and private sector remain wary of global and local headwinds which may undermine investor confidence.
Company or sector specific conditions must be considered when going listed. For example, the Philippine Securities and Exchange Commission (SEC) requires a company to establish three years of profitable operations, i.e., at least P75 million of cumulative net income, excluding non-recurring items, for the latest three full fiscal years and a minimum net income of P50 million for the most recent year. Companies with established profitability and cash flows that are consistent with their equity story will generally generate good valuations.
Up and coming sectors and economies with good outlooks, such as those in mining and minerals due to the global demand for raw materials for batteries of electric vehicles, or technology companies in South Korea due to advances in artificial intelligence (AI), have had good valuations recently. Growing interest in critical minerals such as lithium and nickel are heavily influenced by environmental, social and governance (ESG) factors which has lately been a focal point for benchmarking companies’ potential. These conditions are hard to predict and are often “one without the other,” making it key for companies to prepare early to move fast when the right time and conditions come into play.
DEFINING CORPORATE IDENTITY WHILE BUILDING A LASTING LEGACY
Often characterized by tradition and family values, family businesses may hesitate to go public. The business-as-usual attitude must cease as companies will need to revisit and upgrade certain aspects of their operations, talent, performance measurement, and even redefine strategies.
That is not to say that the family legacy and tradition are lost during the transition to being a public company. Family businesses need to tread this line carefully to ensure that what made them thrive in the past can be part of their current business narrative while adopting new ways of working. Family businesses will need to start the IPO readiness assessment as early as possible to know what needs to change and when. From detailed elements such as the operating or accounting manual to complex business processes such as entity-wide risk management or investor relations, they must assess their level of maturity to know what, where and when help is needed.
A readiness assessment also enables aspiring family businesses to determine current structures and policies (i.e., operating policies and processes, financial and management reporting, data, systems and technology, risk management, etc.) that need to evolve to be future-fit, while retaining the rich history that defines the identity of the family business.
STRENGTHENING PEOPLE AND PREPARING THE NEXT GENERATION
Family businesses must assess how capable their current management teams are in leading them to their desired future. A compelling equity story and strong financials are futile without captains who can steer the ships. Strengthening the management team can include hiring experienced professional managers who are equipped with expansive business networks to help the company grow and thrive as a listed entity. Companies may need to create new positions to help grow and sustain their businesses or manage risks in navigating regulatory complexities and complying with securities laws.
Companies must identify family members who can retain key leadership positions in critical areas of the business and in the board, as well as a succession plan that enables NextGen family members to train early in the ways of the business. Based on the 2023 EY and University of St. Gallen Family Business Index, only 13 out of 179 board seats (7.3%) for 17 family enterprises in ASEAN were occupied by NextGen family members, with practically zero NextGen on the boards of the four Philippine companies included in the study.
Family businesses have rich histories and backgrounds which are integral to a compelling equity story. Company history can demonstrate the readiness of the company to navigate the future while defining what the company represents. A compelling equity story should be able to narrate the humble origins of the business and where it wants to go in the future.
OPTIMIZING INFORMATION WITH THE RIGHT INFRASTRUCTURE AND TEAM
Often, some IPO aspirants inadequately prepare their financial, management and tax reporting, with outdated legacy systems or predominantly manual reporting processes that cannot produce the required reports on a timely basis. Worse, private companies may not have a complete finance team capable of providing these reports and an IT team who can support these organizations.
Prior to going public, these companies must be able to produce financial and non-financial reports with material business information within the required reporting timelines. During IPO, the Prospectus must include three years of annual audited financial statements, reviewed by the underwriters and approved by regulators. Post-IPO, annual and quarterly reports must be submitted to the Philippine Stock Exchange and SEC within the deadlines set.
Suffice to say, these instances highlight the importance of an efficient and effective financial and management reporting process that can generate timely and reliable reports. Information reliability and relevance depends on whether the companies have the right infrastructure and team that can generate reasonably accurate corporate reports. The right infrastructure means that organizations need IT systems and policies that support how data is accumulated, recorded and reported so that management and the public can optimally use this information in making decisions. The right team does not only refer to competent manpower — it means a continuously trained talent pool, periodically replenished through strategic hiring.
PROTECTING THE REPUTATION OF THE FAMILY BUSINESS
Going public raises the company’s profile, making it more visible among customers, partners, and potential business collaborators. This increased visibility exposes the public company to higher reputational risk, thereby increasing scrutiny on the family’s brand. Companies need to institutionalize enterprise-wide risk management and strengthen compliance to protect their reputation.
Family businesses may seek guidance from third-party legal and business advisors to help their companies prepare. They must involve underwriters and regulators early to anticipate issues that may hinder the IPO. Family businesses must also be ready with alternative fund-raising activities in case the IPO is deferred or abandoned so that their growth objectives can remain on track.
ASSESS, PLAN, EXECUTE — AND FOLLOW THROUGH!
An IPO should not only be viewed as a one-time event focused on raising capital. It starts from the decision to do an IPO and transform the company before the listing happens. It is a meaningful journey for the companies and its owners which requires a paradigm shift from the entire organization that cannot be done overnight.
The strategic decision of a family business to go public demands meticulous planning and near seamless execution. Post IPO, these family businesses must be able to deliver what they committed to investors. When done right, barring unanticipated unfavorable economic events, this beneficial corporate upgrade called an IPO should enable family businesses to sustain the value promised to both the family and public investors.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.