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Private company insights Balancing the motivation for an IPO with the pros and cons
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The decision of whether or not to go public is a decision that should not be taken lightly. For some private companies, an IPO can raise capital needed to accelerate growth and achieve market leadership. But not all businesses are suited to life in the public eye. The potential pitfalls can be numerous and the stakes are high. Being aware of the pros and cons when determining if an IPO route is right for you is the first step in determining whether it’s a journey you are ready to begin.
What are the benefits of an IPO? Pros of an IPO • Better access to capital markets to raise money through equity and bond offerings • Flexibility to trade shares with high liquidity and daily valuation • Greater visibility and brand recognition with consumers • Higher valuations for your business are possible as greater disclosure of information reduces uncertainty regarding performance • Potential to diversify wealth on shareholder side • Enhanced ability to attract, retain and reward valued employees through share option plans • Opportunity to bond and incentivize key people in your business with long-term incentive plans
What are the challenges with an IPO? Cons of an IPO • The IPO process may become distracting and time-consuming relative to running your business • Significant IPO project costs • Recurring incremental costs associated with the requirements of being a listed company • New investors with voting rights • Greater transparency to all stakeholders • Pressure to deliver on your promises • Corporate governance duties
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Alternatives to an IPO As you consider whether an IPO is the right strategic direction for your business, there are alternatives to an IPO that you may want to consider.
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Consider running the business If you plan to keep the business… • Continue to operate your business as “status quo” this allows you to take a mental pause and evaluate your goals for the business, and decide what direction you want to take the business, both in the short-term and long-term
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• You can take inventory of where your business is currently and evaluate what can be done to improve your business • Focus on KPI’s that enhance the value of your business - ROI, managing working capital, reducing risks and revisit your leverage model
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Consider a partial or whole sale to a strategic buyer If you are looking for an exit from your business, or you have not planned for the succession of your business, a partial or whole sale to a strategic buyer may be an option for you. Some points to consider when deciding if this is the best option for you; • Consider hiring professional management to elevate your business to a standard that a prospective buyer would want – have the right systems and processes in place to entice a strategic or sophisticated buyer • You will realize the full value of your business • You will typically enter into a compensation arrangement — during this period it is expected that you will transition the relationships you have built through the business over to the new owner • You will experience a change in control and role — if you have been the primary decision maker for your business, this change in role will likely require you to defer all decision making over to the new owner
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Consider a partial sale to a Private Equity Group Private Equity Groups will take different stakes in your business, but control remains their primary objective. Private Equity Groups want control to ensure the direction of your business aligns with their investment objectives. This is often achieved through ownership percentage, board representation or both. Some points to consider when deciding if this is the best option for you;
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• You may crystalize a portion of the growth and value in your business to date, while maintaining a piece of the business itself for future growth • There will be additional reporting requirements – governance features may be included that are different from what you have previously experienced • There is typically a 3-5 year hold period where a Private Equity Group will look to exit the business and realize their assumed ROI • If your business does not perform as well as initially assumed, you may be presented the opportunity to buy back your business at a discount relative to what it sold for. But be aware that you must be inclined to accept that risk and the challenge of rebuilding
Additional factors to consider if an alternative to IPO is right for you Preparation Preparation is key. If you’re considering a whole or partial sale of your business to a strategic buyer or Private Equity Group, you need to consider the due diligence process that will unfold with the transaction. This may include accounting, tax and legal review of all aspects of your business. You need to be aware that a due diligence process will provide transparency around controls within the business and financial performance. Costs There are costs associated with any alternative to an IPO. If you want to continue running your business, there may be an additional costs to consider for hiring professional management to keep your business moving in a more strategic direction. If considering a sale of your business, you should prepare for due diligence costs that will be incurred through the sale process.
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We can help
EY | Assurance | Tax | Transactions | Advisory
The transformation from a private company to a public company is a lifechanging process for any business and it will continue long after an actual IPO transaction. The decision of whether or not to embark on the IPO journey may be the most important decision that you will make as a business owner. We can help you navigate through the considerations involved in this journey, and help you through every stage of this process.
About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
Let’s explore what an IPO or alternative can mean for your company. Contact us at:
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EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2015 Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited. 1365521 EDNone This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.
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