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SME IPO: Process and criteria for going public for SMEs

December 2021

Looking to take your company public? First, you’ll need an IPO, or initial public offering. This is your gateway to the stock exchange, but getting there is by no means simple.

To help you navigate the challenging, time-consuming process of putting an IPO into action, we’ve put together this practical guide on the ins and outs of taking your business public. Aimed at SMEs and start-ups, it’s a great resource for those looking to the future, with their eye on acquiring public backing in the longer term.

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What is an IPO and how does it work?

An IPO is the process of offering shares in a business on a public exchange. This effectively allows businesses to raise capital from public investors, which can play an important role in a new enterprise’s growth and continuity.

As a means of governance, businesses must meet certain standards and requirements to hold an IPO. These standards differ from country to country, as do the regulatory bodies which control them. Here in the UK, the final decision to offer an IPO is controlled by the Listing Authority, which reviews and approves prospective IPO grantees.

IPOs are a powerful way to raise capital, with the potential to significantly increase the profile of start-ups and SMEs. For this reason, they’re often used as an exit strategy for a company’s original founders and private shareholders, who stand to make a significant return on their investment when the company goes public.

Typically, companies seeking an IPO enlist the expertise of investment banks to plot a course towards public ownership. These bodies are ultimately responsible for gauging demand, assessing the market, and setting the final price for an IPO – ensuring the highest ROI and long-term success for the business in question.

What is the process of getting an IPO for SMEs and start-ups?

Acquiring an IPO can be a complex and long-winded endeavour, with a specific framework SMEs must adhere to in order to achieve success. The process is as follows:

  • Investment bank involvement – Typically, the first step is to enlist the help of an investment bank, which takes charge of underwriting. This is when the bank seeks to raise capital on behalf of the business, acting as a middleman between the enterprise and prospective investors.
  • The goalposts are set – Here, lines are drawn on how much a company is looking to raise, the conditions they’re willing to abide by, and how the deal will be structured in the long term. This is typically done on a firm or conditional basis, with the bank underwriting key terms in line with the business’ requirements.
  • A registration agreement is drawn up – The investment bank then draws up an IPO registration agreement, which is passed on to the Listing Authority (or the Securities and Exchange Commission in the US). This document details legal issues, company information, management background, and financial health, all of which need to be approved by the Listing Authority.
  • The investment bank launches an initial prospectus – While the Listing Authority is verifying details about the business and its requested IPO, the investment bank seeks to draw the attention of high-profile investors. This is typically done via a prospectus, which is designed to generate hype about a business’ offering without detailing the price or the IPO release date.
  • Price negotiation begins – Following IPO approval by the Listing Authority, the business and its investment bank begin the process of price negotiation. This is when the bank approaches interested investors to agree a price based on market demand, condition, and the success of the initial prospectus launch.
  • The investment bank sells the shares on the stock market – When a price is agreed and the IPO effective-from date is reached, the investment bank ‘floats’ shares on the stock market. This is ultimately the point wherein a business goes public, with public investors now able to buy into the brand at the agreed share price.

How to prepare to become a public company

While it may seem like investment banks take care of much of the IPO approval process, a lot of preparation and due diligence is required on the side of private businesses to ensure the procedure goes smoothly. From drafting a solid business plan to auditing financial ledgers, acquiring an IPO brings with it responsibilities that require a deft touch to ensure long-term continuity and success as a public company.

Here, we offer some practical tips on preparing to take your company public.

Create an IPO team

As touched on earlier, following through on an IPO request is a long and complex process. So, you need to have the right team in place to manage the procedure and guide it towards a successful outcome.

While your chosen investment bank will do much of the heavy lifting in terms of resources and specialist expertise, surrounding yourself with trusted advisers and legal brains is a sensible move during the IPO process. You’ll need an accountant to give your finances a clean bill of health, while private investment advisers can offer an invaluable second opinion on whether your investment bank is developing the best deal for your business.

Audit your finances

We can’t understate the importance of comprehensive financial auditing during the IPO acquisition process. It’s easier, cheaper and less stressful to maintain tight fiscal control in the long-term as opposed to performing audits shortly before going public, so the earlier you can get your house in order, the better.

As part of the Listing Authority’s IPO approval process, they’ll require audited financial information. The details you provide must marry with their accepted standards, so make sure both you and your accountancy team are familiar with their up-to-date regulations, as they may differ from the type of financial statements you usually prepare.

Prepare for the prospectus stage

When your investment bank begins to approach investors with information about your business, you need to be ready to field questions and take the front foot on selling your brand. Appealing to prospective shareholders now could change the outcome of your IPO in the long term, so you’re looking to sell your vision for the future and get the wheels in motion.

As part of your preparations, always consider one overarching question: why would anyone want to invest in my company? You need to create a consistent message and USP that will appeal to external investors unfamiliar with your brand, which may be different to the one you previously used to acquire the help of private shareholders.

Generally, a rule of thumb at this stage is to under promise and over deliver. Of course, you want to paint your business in the very best light, but exaggerating growth forecasts or financial prospects could threaten the long-term viability of your IPO. Pitch for positivity and growth, but don’t over-egg your success.

The importance of ongoing shareholder communication

After acquiring your IPO and going public, it’s important to maintain regular lines of communication with your new shareholders and investors. Maintaining good relations with those who have backed you could pay dividends in the longer term, helping to build trust while laying the foundation for future opportunities and capital gains.

Whether you’ve recently acquired an IPO or are still reliant on private investment, Perivan can help manage your investor communications to engage shareholders and strengthen existing relationships. To find out more about what we can offer, click here to learn about our investor communications services.

We hope this article has shed light on the often-convoluted world of IPOs and how to acquire one as an SME. If you’re looking for more expert business help and advice, visit the Perivan blog for more guides and features. Alternatively, to hear about our professional marketing and investor communications services, click here to visit the homepage.