How to tell if your small or medium business is IPO ready

An initial public offering (IPOs) is a way for business owners to attract investors without giving away a controlling stake but how do you know if it’s right for your business?

Initial public offerings (IPO) are often associated with large, established businesses.

However, younger and smaller businesses with low revenue but significant growth potential or unique intellectual property (IP) can also attract investors using this method.

While there are other routes for high-growth small and medium-sized businesses to get investment, such as angel investors, venture capital, and private equity, an IPO can also be an option.

In the UK, AIM is the market for IPOs by smaller, growing businesses looking to scale and this article provides a very brief overview only of some of AIM's eligibility requirements.

If considering an IPO, it is important that you take independent specialist advice to determine whether it is appropriate for your business.

Since launching in 1995, almost 4,000 companies have raised over £115bn on AIM.

Read our checklist on how to scale your business.

What is an IPO?

An IPO is the first time a private business offers shares to the public on a stock exchange.

The process of converting a private company into a public company by issuing shares for purchase by the public, is also known as a flotation.

A smaller business might consider going public to raise money for various reasons, including but not limited to:

• financing growth opportunities
• funding the acquisition of another company
• widening the company’s shareholder base.

The benefits of an AIM admission include the following:

• Increased public profile of the company
• going public may make it easier to raise more finance in the future
• control of the brand remains with the founder(s) because there’s no majority external shareholder
• enhanced brand awareness which can help to generate sales
• boosting employee loyalty and motivation by providing them with shares
• a second market for shares that allows existing shareholders to exit.

However, it is important to note that AIM admission does place increased regulation and continuing obligations on the company and its management.

AIM, the financial market for smaller businesses, has a regulatory approach that is specifically tailored to the needs of small companies, giving them the opportunity to raise finance as easily as possible.

A company seeking admission to AIM must comply with the AIM Rules for Companies (PDF, 700KB).

There is no minimum size or trading history for companies listing on AIM.

There is an extensive due diligence exercise undertaken before a company applies for admission to AIM.

This exercise covers, amongst others, the company’s business, legal and financial affairs and is used to draft an admission document.

The company and its directors ensure that the admission document is true, accurate and not misleading and does not omit material information.

All statements in the admission document are then checked to ensure they are true, accurate, and not misleading to avoid the risk of criminal and civil liability.

In addition, you’ll need to appoint a nominated adviser (often called a ‘Nomad’) to help prepare and admit your company to the public markets.

In addition to appointing a Nomad, you also need to appoint a broker and produce an admission document as well as a prospectus if required and the company should ensure that it:

• has freely transferable shares
• complies with any special conditions imposed by the London Stock Exchange
• admits all of the shares in the particular class to be admitted
• submits a pre-admission announcement.

Planning and negotiations for an IPO generally take 12-18 months, although some businesses might take longer.

The process for listing generally takes 10-12 weeks.

Once a business has successfully listed, it must comply with any continuing obligations set out by AIM.

Signs that your business is IPO ready

Key indications that your business might be ready to consider an IPO are:

Addressable market opportunity

One aspect of your business that potential investors may take into account when coming to an investment decision is how large your addressable market is.

You need to understand your addressable market before seeking investment via the public markets.

It’s important to fully grasp your market, who your customers are, and your business’s potential to grow revenue.

A total addressable market (TAM) is the available market for a product or service if you reach 100% of customers.

This is the metric you can use to understand the potential of your business.

A great story

Your business ‘equity story’ could be key to a successful IPO.

This clearly and concisely outlines why your business is an attractive investment and why investors should buy your shares.

If you have got to grips with your equity story, you could be ready to consider going public.

You need to know what distinguishes your company from its competitors.

You should avoid common claims such as ‘leading’ and ‘groundbreaking’ without clear and defendable evidence to back them up.

You need to understand your strategic growth plan and how it will be achieved, while your story should clearly communicate the addressable market opportunity that your business offers.

Finally, it would be a good idea if you understand your business’s risks and how you will tackle them.

Type of businesses

Certain types of businesses may be more suitable for IPOs than others.

A business with unique intellectual property (IP) in growth sectors such as technology and life sciences is a good example.

This is particularly important for early-stage growing businesses due to having limited sales data.

Providing detailed market research backing up your claims and holding approved trademarks, patents, and designs for your IP can demonstrate strong potential for growth to investors.

Strong management team and board of directors

Investors backing an IPO will look for a high-calibre management team and a board of directors with experience, an in-depth understanding of the market they are operating in, and the skills to run a public company and manage investor relations.

Independent board directors are required for public companies.

If you already have non-executive directors with a track record of running public companies or scaling a business in your industry, it will stand you in good stead for a successful IPO.

A board is crucial to helping the listing business’ management team transition from a private to a public company and assisting with growth following the IPO.

Financial health and accuracy

Investors want to back businesses with strong and sustainable long-term growth potential.

They will expect to see a record of consistent financial predictions and accurate delivery of sales.

To be ready for an IPO, your business’ finances should show little difference between your forecasts and your actuals over several quarters to demonstrate your ability to predict growth.

Such predictability will help to differentiate your business and could be a factor in achieving a successful IPO.