The time to consider taking your company public is often just as you have gotten your business to a certain level of success. Your product or service is in high demand by the customers you targeted, your team and staff are excited to be part of such a fantastic growing company, your business is featured in the media and attracting buzz, and people cannot seem to stop talking about your company. From the outside looking in, the company looks set to take off.
However, the reality within the business itself may be different. The business is poised to grow, but the cash the company is generating is not enough to make those expansion dreams come true. These can include entry into new market segments, expansion into another geographic location, or hiring highly skilled and specialized resources. You worry about how to fund your next growth stage and begin to consider your options.
First, you might consider the banks. Traditional commercial banks struggle to risk their depositors’ funds by lending to you for a variety of reasons including:
- Your financial statements and projections do not reflect that you are able to repay their loans within their required timeframe.
- You do not have enough equity in the business or “skin in the game”
- You do not have enough hard assets or collateral to cover the amount of the loan plus a buffer to account for fluctuations in asset values.
If the commercial banks are not for you, the equity markets can be attractive. Recently, especially in Caribbean territories such as Jamaica and Trinidad and Tobago, there has been a strong push to encourage young private companies to seek capital via listing on their local stock exchange as part of an Initial Public Offering (IPO).
There are several benefits to preparing an IPO and listing on the stock exchange. In Jamaica, companies that list on the Junior Stock Exchange receive a full income tax holiday for the first 5 years after listing and a 50% income tax holiday during years 6 through 10. The same incentives have been offered to SMEs operating in Trinidad and Tobago by the country’s Minister of Finance in the country’s National Budget for 2020/2021.
While these incentives provide young private companies with an avenue to access patient capital to fund growth and expansion, there are significant hurdles to overcome to ensure that your company:
- Is ready to go public,
- Has a successful IPO, and
- Can continue to grow after the IPO.
What to Do Before Going Public?
The decision to go public should not be a hasty one – it should be an evolution that you prepare for at least a year in advance. In my previous investment banking career, we advised companies to do a series of private equity financing deals before going public. This helps instill a routine and system of reporting to shareholders, as well as addressing internal governance and controls issues before exposing your business to the public market. Before going public, you should ensure all documents and disclosures are prepared, customer insights and feedback are collected, and financial controls are in place. I elaborate on each of these below:
General Housekeeping (Getting Documents in Order)
To prepare for an IPO, your company should have the following documents ready, available, and organized at all times:
- Company’s Incorporation Documents
- Records of meeting minutes
- Share register
- Shareholder’s agreement
- Copies of major contracts such as lease agreements and customer contracts
Additionally, adequate disclosure should be provided for any outstanding or potential legal matters. As much as possible, such legal matters should be dealt with before closing a financing round, or clearly set out at an early stage in the discussions with a potential investor.
Customer Insights
Any successful company, especially a public company, has a thorough understanding of its customers, their needs, and how to best serve them and connect with them.
It is not enough to have a standout business – to be successful, you must be in tune with what your customers are seeking. Understanding your differentiating factor is key to maintaining a competitive advantage. Similarly, understanding why your customers choose you over a competitor speaks to an understanding of your customers’ behavior and needs.
To stay in touch with those needs, ensure that you are constantly collecting feedback from your customers. Feedback from customers is a source of rich information about your product or service. Often provided in real-time, the feedback can indicate what you need to adjust and can also identify opportunities for diversification or growth if your customers are asking for new or enhanced products/services.
Customer feedback mechanisms can be as simple as a customer feedback form/short survey, an email asking for a rating or review, or a follow-up phone call.
The type of product/service you offer will determine the frequency of customer feedback that is most useful. If you run a service business, it could be at the end of each service provided or at every customer touchpoint. If you run a project-based business, it could be more useful at the end of each project. If you are offering a product, it could be after each purchase. The frequency of customer feedback speaks to how engaged you are with your customers and their user experiences and demonstrates your commitment to improving customer service.
Financial Controls
Lastly, no IPO would be possible without demonstrated financial controls. Financial controls are the procedures, policies, and means by which an organization monitors and controls the direction, allocation, and usage of financial resources. They are at the core of resource management and operational efficiency in your organization.
Maintaining accurate and up-to-date financial records is an important component of a strong financial control system and will be key especially as your business starts to scale rapidly. This ensures that you are aware of what cash you are meant to receive in the future and what you are obligated to pay. This gives a more complete picture of the performance of your business than cash alone.
Monitoring the changes in profits monthly, allows your company’s management team and investors to keep close track of the financial performance and health of the company from one period to the next. This provides further support to management’s explanation for any activities that would have led to the performance being reflected in the financial statements.
With a high volume of transactions (>20/month), it is advisable to rely on accounting software to reduce human error and ensure timely updates. Having a system and software in place assists in ensuring that all records are properly maintained and may ease the process to prepare accurate and reliable financial statements.
These are just some of the many issues to consider before deciding if your company is ready to embark on the IPO process. It is more of a marathon than a sprint, and not a decision that should be taken lightly.
In the next article, we will map out in greater detail the process of raising capital via an initial public offering.
