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How to get IPO ready

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Listing on the stock exchange is a complex and expensive process, often consuming up to 10 percent of the funds raised, so it’s important to get it right.

What should a company have in place before undertaking the often arduous task of listing on a stock exchange? An IPO is not for everyone. As such, there are four golden rules that a company must first consider. Do you have:

• A strong, long-term strategy for commercial growth that can be easily explained to investors?

• A well-rounded senior management team and board of directors?

• Reliable and trusted advisors?

• Robust financial, operational and information systems capable of meeting the additional requirements placed on listed companies?

The board of directors can assist the IPO process by bringing a variety of important skills and experience to the company. In addition to the founders of the company, it is helpful to have board members with backgrounds in investment banking or corporate finance, accounting or financial advice, law and the business sector the company is trading in. Board members who have good networks in the business community can help attract investors to the company.

Having a long-standing relationship with a range of professional advisors is vital to any business, but particularly so for a company that is preparing for an IPO. In addition to legal advisors, accountants and independent auditors, there are a range of specialist advisors who can assist with the listing process including:

• Stockbrokers who can assist with the management of the IPO process

• Share registries that maintain lists of share applications and shareholders

• Investor relations consultants that can maximise the press coverage of the float and organise roadshows

• Underwriters that ‘insure’ an IPO by agreeing to buy any unsold shares

Depending on the size and growth stage of the company listing, there may be a single underwriter, a range of firms that underwrite a portion of the shares or no underwriter at all.

Maximising the value of the float

Before listing, the company and its underwriters will conduct a roadshow to tout the benefits of buying shares in the company. This also gives potential investors the opportunity to meet the company’s management and board.

The company and its brokers will discuss how much the company could expect to raise given the market conditions. Roughly 75 percent of IPOs trade at a premium to the price at which the shares are issued. However, this is often because the broking firm will undervalue the shares to make sure they are all sold. Also, the share price usually surges in the initial stages as speculative investors buy for a short period of time. As these investors sell their shares, the price can quickly drop.

Networking is a key element of raising capital in all businesses and the IPO is no different. Particularly for smaller, early-listing companies that may not be underwritten, the directors’ contacts are a vital source of investors. Investors will need to be comfortable that the company has a solid set of accounts, a reliable structure and management team and has researched its market carefully.

Preparing the prospectus

The prospectus is the centrepiece of a company’s listing on a stock exchange. It is a comprehensive, single source of information on the listing for regulators and potential investors. A prospectus includes the following elements:

• Chairman’s letter. An overview of the company with a mission statement of the company’s vision for the future.

• Investment overview. The structure and details of the offer – number and type of shares, how much the company intends to raise and how it intends to use the proceeds – and an indicative timetable.

• Background. The background of the company, management and board. Details of the intellectual property that give the company its value.

• Finances. The company’s current finances, financial history and a report from an investigating accountant.

• Administrative details of the offer.

Because of the complexity of this document, creating a prospectus is very time consuming and costly, taking four to six months on average. Working with trusted third parties to prepare a prospectus can let the management team focus on running the business.

Once prepared, the prospectus needs to be lodged with the Australian Stock Exchange (ASX) and the Australian Securities and Investments Commission (ASIC). The company can then apply to the ASX and if it meets all the exchange’s requirements, begin trading.

And lastly, you will need to ask yourself, do you have the turnover or projected profit to support the $500,000 that most listed companies spend on managing their compliance requirements and shareholder needs every year? If not, it might be worth considering other strategies for growth.

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