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Is an IPO a real option for your business?

After 5 years in the doldrums the Australian IPO market is showing some early signs of life and there is finally some investor appetite for deals at the smaller end.  This momentum still has some way to build but brokers are already running around trying to persuade private companies to list.Companies generally list on the ASX for a combination of reasons:

•    Access to capital for growth
•    To give shareholders the ability to sell their shares, either now or in the future
•    Expectations of achieving a higher value rating for the business

ASX listing can be an excellent path for many businesses.  However many smaller companies that have listed on the ASX in the past shouldn’t have done so and many are now languishing with the costs of being listed but not the benefits.  No doubt the directors and owners of some of these companies wish they’d known then what they know now!  

Also it’s a historical fact that many listings fail early to deliver on the promises made during the IPO and investors have been left disappointed; in some cases the reasons for this could have been avoided if the IPO had been better structured.  It’s difficult to recover investor confidence once it’s been lost and if that happens, shareholders’ objectives for listing are unlikely to be met.  

So if someone suggests an IPO for your business, we suggest you first ask yourself these basic questions:

1.    Does the business have a realistic growth path to a market valuation of $50m or more within 2 or 3 years?  Without a financial profile like that, listing is unlikely to achieve shareholders’ objectives;

2.    Is the business sophisticated enough to deal with the requirements of being listed in terms of reporting and scrutiny?  For example, does the business have an experienced CFO on board and does its CEO actively use the road map he/she prepared, supported by good financial reporting and analysis?;

3.    Are the current owners prepared to have the performance of the business (and themselves) scrutinized and held to account constantly? Remember friends, competitors, customers, suppliers, brokers and people in the street may be shareholders and some will feel they can ask about it; and

4.    How long do the current owners want to stay with the business, as managers and/or shareholders?  Ideally the current management team should be committed to managing and growing the business for the foreseeable future. If the founder and visionary is still a part of the business, investors will want to see his/her continued knowledge, interest and enthusiasm for the business demonstrated through the listing process and beyond.

It’s crucial that companies and business owners contemplating listing clearly understand not only the objectives of listing, but the associated risks and challenges. The process of listing can be highly beneficial but is also difficult and expensive to navigate with the interests of different parties often in conflict. It’s  vital to have independent and expert advice before committing to a listing – much better to fully understand the issues upfront than after it’s too late.

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