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The IPO Endgame: What are the Considerations for Start-ups?

Initial Public Offerings are generally seen as the effective means to capital, visibility and credibility.

Double exposure of stock market in tablet with money and chart.Entrepreneurs have big dreams to grow their business to its fullest potential and reach a status of recognition. Other than a solid vision and much hard work, growth and business expansion require substantial capital. While entrepreneurs may rely on their own funds and even financial support of venture capitalists to begin with, the capital market presents vast funding opportunities to accelerate growth and achieve market leadership. Initial Public Offerings (IPOs) are generally seen as the effective means to capital, visibility and credibility. Moreover, IPO makes an attractive viable exit strategy for private investors and venture capitalists. Hence, “public listing” is often viewed as the ultimate endgame for many emerging companies.

Start-ups are attracted to a public listing for the numerous potential benefits, including easy access to capital markets to raise money through equity and bond offerings, gaining liquidity and daily valuation for shares, increased brand recognition and prestige, enhanced ability to attract and retain management and employees through stock options, and having a new M&A currency through shares.

Notwithstanding the benefits, start-ups must also be fully aware of the potential drawbacks of going public. Companies can expect to incur high IPO flotation costs of at least S$1-S$2 million on professional fees and other listing related expenses during the IPO process. In addition, post-listing operational costs may increase by approximately 20% – 50% for new corporate headcount, directors’ remuneration, statutory obligations and financial reporting infrastructure to cater to the stringent continual listing obligations. Other drawbacks include holding lower stake in the company and gaining new investors with voting rights, the burden of dealing with shareholders’ expectations and corporate governance duties, and loss of privacy and limitations on management’s freedom to act.

Listing on the Singapore Exchange

The Singapore Exchange (SGX) offers the options of Mainboard and Catalist for aspiring companies. SGX Mainboard, with its high profit and market capitalisation criteria, tends to attract large established companies with longer operating history. Hence, it is perceived to be more prestigious and draws greater interest from institutional investors. On the other hand, Catalist caters to fast-growing enterprises due to the absence of profit requirement. Companies favour the Catalist platform for the shorter listing process due to its sponsor regime and less involvement by SGX in reviewing the listing documents. The continuous listing obligations are also less stringent for Catalist issuers in some areas, hence allowing for more ease and flexibility in executing corporate actions. However, the relaxed rules may be detrimental to investors’ protection and position Catalist issuers as weaker in governance.

Below sets out a comparison between Mainboard and Catalist

Estimated IPO Timeline

Note: Preparation of listing documents may require 3 to 6 months and vary subject to restructuring, audit and other due diligence work carried out.

The entire IPO preparation and execution requires at least 6 to 12 months, with much time, money and resource committed into the process.  Therefore, how can start-ups prepare for the IPO journey to work towards a successful listing?

 

Demonstrate a sustainable business model with reasonable revenue

First and foremost, start-ups must demonstrate sustainable business models and have attained reasonable revenue track record. Investors are interested in IPO companies that have performed well with a solid track record, supported by historical financials, and have an actionable plan that can sustain growth and justify the use of IPO funds. These form the backbone of a strong equity story. In addition, start-ups should work towards outperforming their competitors on both financial and non-financial indicators. This will distinguish them apart from peers and maximize their valuation.

 

Evaluate various possible capital raising or strategic options.

 Living under the public’s scrutiny may not suit every company. The start-up needs to consider the direction of its existing business, and its future business plan post the IPO before planning for an Initial Public Offering. Business owners should consider other alternatives such as sale to strategic buyer or financial investor and other financing transactions which may replace the IPO route. Start-ups may also undertake pre-IPO transactions such as strategic acquisitions and joint ventures, in tandem with IPO planning, to accelerate the development of the business and increase valuation of the company for the IPO transaction.   Having successfully completed pre-IPO acquisitions would add credibility to any post-IPO acquisition driven growth story.

 

Conduct an IPO Readiness Assessment.

Start-ups should approach the IPO as a transformational process rather than just a financing event.  It is advisable to conduct an IPO readiness assessment to evaluate and fine-tune the financial reporting structure, internal controls, risk management and business structure. The IPO readiness process allows the pre-listed company to make corporate improvements and function like a public company even prior to the IPO.

 

Perform a diagnosis on the financial accounts. 

 The financial accounts of start-ups may have been unaudited in the past. As part of the IPO readiness assessment, start-ups should engage professional advisers to perform a health check to flag out any accounting irregularities and financial non-compliance so that rectifications can be made early and the financial accounts can be correctly presented as the company proceeds into the IPO transaction.

 

Implement the appropriate financial reporting structure and systems.

Due to their relative small scale of operation, start-ups often outsource their accounting function and tend to be weak in accounting or finance related systems and documentation. Hence, it is crucial to recruit competent finance personnel and improve or implement adequate accounting policies and procedures to deal with the expanded financial disclosures e.g. segment reporting, frequency of reporting for a public company and a whole host of compliance obligations post listing.

 

Enhance internal control practices and implement corporate governance framework.

 Proper internal controls and corporate governance are almost non-existent in most start-ups since they typically operate with smaller headcount and resources are better channelled towards business development rather than compliance matters. The mentality will have to change with a potential IPO in contemplation. Both investors and SGX hold companies to a high standard of corporate governance and internal controls. Public companies are expected to adopt corporate governance principles and policies that protect shareholders’ interests. This include recruiting qualified independent directors and form various committees such as the audit committee to provide the financial oversight of the business and transparency in the reporting of related party transactions.

 

Assemble a right team of professional advisors to guide you on the IPO transaction.

 It is vital to have an experienced team of professionals comprising, bankers, lawyers, accountants, and investor relation advisors to help navigate through the listing requirements, conduct proper due diligence, comply with prospectus disclosures and advise on financial, tax and corporate restructuring etc. Good professional advisors will serve business owners and hand-hold them through the challenges of an IPO process.  A quality external team, coupled with a strong competent management team will successfully lead the company through the rigor of the IPO process.

 

Conclusion

 Planning an IPO is not an overnight task and requires a thorough consideration of the company’s motivations and evaluation of the pros and cons before embarking on the IPO route.  Once the start-up is prepared to go public, launching an IPO will require meticulous planning and execution, the right window opportunity and the right pricing to ensure that the IPO is a success.

Nexia TS serves more than 10% of the public listed companies on the SGX and has assisted in more than 30 successful public listing engagements to-date through its capabilities as Reporting Auditors, Pre-IPO consultants and Pre-IPO Internal Controls advisors.  For more information and guidance on IPO planning and execution, please get in touch with our IPO specialists:

 

CONTACTS
For more information, please contact:

Grace Lui
Director
Valuation and Transaction Services
gracelui@nexiats.com.sg

Chan Siew Ting
Director
Assurance & Capital Markets Transaction
chansiewting@nexiats.com.sg

Assurance, Valuation & Transaction,