Entrepreneurs who dream of taking their firms public might anticipate declaring their IPO by striking the stock exchange bell and celebrate an elaborate closing meal.
However, these heady pre-IPO fantasies may swiftly run into several substantial real-world problems that public company executives encounter regularly. There are significant challenges that public firms regularly face that private company owners should carefully consider before deciding to go public.
Indeed, it is a crowning glory, but a lot of planned hard work has to be put in to win the crown. When planning to take your company public, it is critical to map investor sentiments for the brand/ company and create the right pitch that is attractive and valuable for all proposed stakeholders. Then comes conducting due diligence and drafting of a proper road map on handling all the incremental compliance requirements that come post the IPO. It should be recalled that there will be new responsibilities and restrictions that may come for the management post IPO, and these need a proper assessment before taking the dip.
The many laws that regulate the running of public corporations account for the significant variation in how public and private companies are handled. The company will be required to follow extensive internal compliance procedures, file financial reports, accept financial performance audits by independent third parties and comply with operating rules that did not exist when the company was a private, closely owned enterprise.
When the company decides to go for IPO, it must build the right team to go public; selection of competent lead managers and merchant bankers for its issue is a must. In technical preparation, assessment of the possible listing venues and checking eligibility, for respective exchanges should not be ignored. The hardest part is the internal restructuring of the business entity. Companies often do not plan their efficient internal restructuring before their IPOs. It is necessary to restructure to enhance company/ brand/ share valuations, paving the way for easier compliance management in the future, organising the existing capital structure, and better presentation and transparency in the financial statements.
Identification and appointment of independent directors are vital; in the corporate boardroom, these directors are frequently regarded as the forerunners of shareholders. They have a fiduciary responsibility, which is important in company governance. Because independent directors play such an important role, proxy advisers who give voting recommendations scrutinise resolutions pertaining to their nomination and reappointment more closely.
Deciding the IPO valuation
Many investors who participate in IPOs are not aware of the process by which a company’s value is determined. An investment banker has to be hired to determine the company’s value and its shares before they are listed on an exchange. It is vital to understand the influence of comparable price-to-earning P/E (selected on different parameters, i.e., industry, revenue characteristics, book value, and return on net worth) on IPO pricing. The P/E ratio is one of the most generally used measures for determining a stock’s relative valuation among investors and analysts. A P/E ratio is a tool that can be used to determine if a stock is overvalued or undervalued.
While a successful IPO would result in a large cash windfall, the company’s founders should weigh the trade-offs. Following the company’s successful public offering, the management team will be forced to devote more time and resources to comply with the regulatory regime. In the pre-launch stage, an assessment of the possible listing venues has to be done in detail. Another challenge is to time the market as one cannot decide to go for an IPO when the market is down; investor sentiments should be kept in mind before finalising the launch date, press release date, etc.