Long road to successful listing
Many entrepreneurs are aiming for an IPO, but it won’t happen overnight
Treading water is not an option for most entrepreneurs. Once their businesses are past start-up — perhaps even turning a small profit — their eye turns to growth. For most, the faster the better.
The question then becomes how this might be funded. At the smaller end of the market there are a few choices: once the entrepreneur has exhausted the traditional “three Fs” — friends, family and fools — and any angel finance, the three options are equity, debt or a hybrid of the two, convertible debt.
As the business grows, the funding options increase. An end goal for many entrepreneurs is the IPO (initial public offering), providing the most efficient, flexible and liquid access to the capital markets through equity and bonds.
But, warns EY partner Brad Wheeler, an IPO is a significant step up from other forms of capital raising, in terms of preparation, process and cost.
In fact, particularly for younger businesses, it can involve a complete transformation of the organisation — people, processes and culture — and because the costs and compliance are lower, many businesses opt for private capital funding as a stepping stone, or an alternative, to an IPO.
But one thing that doesn’t change when looking to raise capital is the need for entrepreneurs to be open to challenge and change. Private capital can add not just the cash itself, but also the experience and rigour of those investors, and ease the transition to an IPO.
The key issue is being clear about your reasons and being able to tell a strong equity story, Wheeler says. “Why do you need the capital? How will you use it? Are you sure this is right for your business at this time? If you can’t articulate a vision and a growth plan, it’s not a very compelling investment story.
But we can identify areas where the business is failing and we will support you through.”
Do your prep
Preparation is critical; the business must be made “investible”. Businesses that successfully IPO typically spend two years-plus building processes and infrastructure, recruiting executive and advisory talent, getting in front of financial reporting issues and securing a directors’ commitment to going public.
There’s corporate governance and regulatory compliance, not to mention the increased public scrutiny from investors, analysts and journalists. Audited — rather than compiled — accounts. Continuous disclosure. Relinquishing control. And pressure to deliver on your promises.
The lead time is important. “What we don’t want,” Wheeler says, “is for someone to say ‘we need to raise capital in three months’ time’ because shareholders will lose money. You want to be thinking at least 12 months out — preferably longer — so we can fix failings within the business and make it investible, so when they seek this capital, they’re getting top dollar.”
For successful IPOs, the business has likely operated as a public company for at least a year before listing.
Not an endgame
EY has teams on both sides of the Tasman to advise and assist businesses through the IPO process, which it views as a “value journey” rather than an endgame. It’s a structured approach, heavily reliant on evaluation, strategy, milestones and a big dose of corporate soul-searching.
First, the business should weigh up its options — and the pros and cons — and explore alternatives, such as a trade
sale, if it’s not operationally ready for an IPO, says Andrew Taylor, EY New Zealand’s IPO Lead.
“Most under-estimate the challenges of the IPO process and life as a public company post-IPO. And many entrepreneurs find managing additional stakeholders, such as an independent board and institutional investors, and the periodic public reporting process, to be a challenge.”
But while careful planning is imperative, so too is agility and flexibility. It’s all about timing and catching the wave — and people are sometimes unprepared or unwilling to make a move.
“Too often,” says Wheeler, “we see small New Zealand business saying ‘We’re fine, we’re under control’ and six months later we find ourselves working for a buyer on the other side who’s looking to invest in that very same company. So the buyer gets a cheaper deal than he should because the company hasn’t got itself prepared, ready or taken good advice. It’s a constant war story, working for buyers on the other side where we’ve seen value eroded by the sellers.”
Missing the market
It’s similar across the Ditch. Rob Dalton, an Australian mid-market EY partner, says timing is crucial.
“You need to be able to move quickly because we’re in such a dynamic time. If you miss the moment in your market, someone else will take your spot and you’ll be left with the technology that’s outdated. So it’s being able to grab the opportunity, with the technology you have, and knowing it’s right. I’ve seen people who’re just ahead of their time and nobody can understand them, and those who’re just behind in their timing and their business model has gone.
“It’s tough because there’s no science to it and you’re mostly dealing in the dark. If you’ve got no debt, and you’ve not had to give away equity, it’s a good position to be in but I’d ask ‘Are you moving quickly enough?’
“You can see the loop you get into. You might be sitting on a cash-positive business that’s about to be surpassed and doesn’t have a place any more.”
But Dalton has another example — a fast-growing business at risk of moving too quickly. “We had a new business that had been operating for about 12 months. It was burning cash but had just got a new contract in the US and had some fairly well-established shareholders who had put in equity. They went shopping for audit, tax and IPO services. Everybody said, ‘here’s our proposal’. I asked why they wanted to IPO.
“They looked at me and said, ‘that’s a good question’. I told them they were a very young organisation and would be giving away equity at their absolute peak time, at the absolute lowest price for them. If they went to an IPO market it would dilute their interests and they would get a very low valuation because it would be all based on upside.
“Once you go on upside and convince the market, you may as well buy a coffin. If you miss the market, you miss it only once.”
House in order
If he could give entrepreneurs one piece of advice before any form of capital raising, Dalton would urge them to get a strong shareholders’ agreement first, for both existing and new shareholders.
“And get good legal advice. When you’re trying to raise equity and bringing in new people, you need to make sure your house is in order first. [The agreement] should talk about the roles and responsibilities of the founder and other shareholders, and prescribe how the agreement can be unwound. Get all of this in place and issue the shares before you start trying to raise equity.”
Wheeler concurs. “If you haven’t set up shareholders’ agreements, it can make it hard for investors because you’ve got all these minorities frustrating the process. Investors find that too hard.”
Once you go on upside and convince the market, you may as well buy a coffin. If you miss the market, you miss it only once.
Rob Dalton
An IPO is a significant step up from other forms of capital raising, in terms of preparation, process and cost.
Brad Wheeler