Initial Public Offering (IPO)
An initial public offering enables a business to raise finances publicly. This means that a business can float on a stock exchange, selling a set percentage of shares to multiple investors. This may sound similar to crowdfunding, however, a stock exchange provides a readily available market for investors to sell on their shares. The amount of equity offered can vary, however IPOs are often used as an exit strategy for the founders and early investors in order to realise their investment.
There are three different markets within the London Stock Exchange:
• The Main Market: This is for businesses that are large enough to be included within the FTSE (Financial Times Stock Exchange) 100 and 250
• The High Growth Segment: Primarily for tech-specific markets not quite large enough for the Main Market
• AIM: Standing for the ‘Alternative Investment Market’ this is for smaller businesses who are still growing at a fast rate and have the size to list, but are not quite large enough for the FTSE Market.
If businesses are able to list, they can expect to raise up to £200m on the AIM, or up to £1bn on the main market. This depends on the valuation for the business and how much equity is being given away. For businesses to list, they need to have at least £5m turnover and be established and growing. The process for gaining investment by this method is very expensive and time consuming, and therefore it must be seen as a long-term strategy.
IPOs are expected to have scale advantages and need to be able to demonstrate to investors as diverse as pension fund managers or private investors that they are the most efficient way of growing capital and offering a return on investment. The senior management often spend as many as two or three days a week working on the business to maintain investor confidence. At times, the rules and rigor of running a public company can seem onerous.
Typical Investment Size: Up to £200m (AIM), up to £1bn (Main Market)
Stake: 25% to over 50%
Involvement Timeframe: To perpetuity
The investment gained from an IPO will be some of the largest amounts of cash a business can hope to receive.
As a long-term strategy, it is easier to raise more money once the business has been listed.
IPOs are flexible in the amount of equity relinquished. Depending on the value of your business, you may retain a controlling share, or you can use it as an exit strategy.
An IPO can help with positive PR, increasing the profile of your business which in turn will help increase sales and therefore growth.
As it involves public listing, this creates a secondary market for the shares in your business, enabling existing investors to sell their shares with relative ease.
Dilutes the founder’s ownership of the business, often to a minority. This means you will be unable to make the final decisions in a business if you are still wanting to be involved.
The process of achieving an IPO is very costly, with fees on average totalling 8% of the money raised.
Investors in listed companies typically require a return in the form of dividends. Dividends are often more expensive than paying interest on loans and therefore your cost of capital will increase.
Your business will have to service many more stakeholders than if it were a private company. This can take management time away from running and strategising for the business.
The senior management often spend as many as two or three days a week working on the business to maintain investor confidence.
This document is intended to be an aide-mémoire to help you consider different forms of finance and which ones might be appropriate for your business; it is not a comprehensive guide to all forms of finance. There could be different tax and legal implications associated with different forms of finance. Professional tax and legal advice should be sought to prepare for these different forms of finance.