Initial public offerings (IPOs) garner a lot of headlines, but actually make up a small proportion of business exits, as they are available only to businesses of sufficient scale and sophistication to meet the qualifying criteria and exposure to the rules and discipline of public ownership. The number of market-ready firms in Ireland therefore is generally quite small - maybe up to 25 companies a year, with perhaps five ultimately taking the steps to go public in a good year.
Notwithstanding those small numbers, an IPO is the best way to create wealth for shareholders and scale for stakeholders. The prospect of a highly lucrative exit is naturally attractive for entrepreneurs. But the benefits of going public are not limited to the financial pay-out it can achieve. An IPO brings many structural benefits for a business: the preparation itself is a long-term investment in sound management and financial practices, while life as a public company imposes value-enhancing discipline on the whole organisation from top to bottom. A successful IPO can be a significant milestone in transforming a company’s ability to drive future growth.
In practical terms, the reasons for exiting via IPO come under the following headings:
1. Liquidity for owners: a key driver of IPOs, as with any exit, is to create a so-called ‘liquidity event’ that pays cash to the owners and investors of a business. This has the effect of de-risking ownership and providing the liquid funds to diversify wealth.
2. Ongoing source of capital: the main reason companies go public is access to capital from a wide pool of potential investors. That diversifies funding options for the business and provides successive exit points for investors or owners who wish to reduce exposure over time.
3. Acquisition currency: new capital can be deployed in a variety of ways: for example, to fund growth and acquisitions or to break into new markets.
4. Credibility with banks: public companies tend to improve their bank facilities after listing, meaning more financial firepower to drive growth.
5. Visibility with customers and suppliers: these benefits can help a business grow, achieve better pricing, source new funding, or exploit opportunities.
6. Incentives for staff: the ability to attract and reward employees with liquid shares is also a top consideration for companies in the war for talent and growth.
Structuring the offer
How the offer is structured will have a significant impact on the personal outcomes of the business owner and other investors, as well as the company itself. Key decisions on shareholder structure must be made early in the process but will have long term consequences on shareholder value and future sell-down opportunities.
A minimum 25% free float is a standard starting point to balance liquidity and investor allocations. Depending on the size of the company, this should allow for sufficient trading in the shares for investors who want to sell more into the market later. Getting the right mix between primary issuance (new money) and secondary trading (sell-down) will help retain the value of continued shareholding while making cumulative share sales financially attractive.
Pitching the valuation at the right level is a similar balancing act. ‘Leave a little for the next guy’ is a good rule of thumb. A successful IPO doesn’t just make money for the original owners and investors but creates an attractive investment opportunity for the next round of investors. After all, that’s where the exit pay-off is coming from.