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Considering an IPO? Why Finances come First

Many businesses have a Stock Exchange Initial Public Offering (IPO) on their radars. There are many reasons for this – for some, an IPO is a major fund-raising exercise. For others, it’s about the credibility that comes with having a business that meets stringent listed criteria. For others, it’s about a vehicle for releasing equity and delivering a return to private investors.

Whatever the reasons, an IPO is a serious and time-consuming proposition. In order to even think about taking this step, boards need to understand the requirements placed upon them in order to attempt a listing – and be able to put the requisite processes and policies in place to be able to meet ongoing compliance and governance requirements.

The Role of Finance

Understandably, stock exchanges and potential investors want to know that your company is a good investment. This is judged on a variety of criteria, including:

  • Financial stability and controls
  • Market share and opportunity
  • Strength of board members
  • Approach to governance, compliance and ESG
  • Product or service development and intellectual property

Of these, financial stability is often the most scrutinised. A business approaching IPO must demonstrate – before the listing process starts – that it has adequate controls and processes in place to meet the requirements of the listing market. These requirements vary between markets, so those in place in London will be different from those in Frankfurt or New York.

Of course, some companies may already meet these standards. But there are challenges for various types of business:

Fast-growing businesses may have been concentrating on product and market, without paying too much attention to financial control. It may be using legacy systems, still relying on spreadsheets or have incomplete visibility across the business.

Complex businesses, such as those working in multi-currency environments or with intricate structures developed through M&A activity, may have survived by cobbling together existing finance systems and processes. This may create problems with accurate reporting and forecasting.

What are CFOs required to do?

In terms of listing on the London Stock Exchange, there are two sets of overall requirements: those that are part of the listing process and those for post-listing.

Disclosure document

Your listing depends on your prospectus or disclosure document. If you’re considering listing on the AIM market rather than a full listing, you will need to prepare an admission document instead.

This document will need to include consolidated financial statements for the past three financial years. These will need to be independently audited and be not more than six months old, depending on your year end and your target date for listing. Your advisers can guide you on this.

These statements will need to be IFRS-compliant and you will have to show that your financial procedures have been consistent during this time. These accounts are intended to show your financial track record to help investors make an informed decision.

NOTE: If you are considering an IPO and do not have consistent policies or procedures in place, you will need to spend time getting your systems and approach in order so you can meet this requirement.

How do you prepare for the disclosure document?

If you have already appointed advisers for your IPO programme, they will work closely with you to identify any problem areas. In many businesses there are areas of weakness in terms of controls or procedures and these must either be remedied before you present your disclosure document, or you must have clear plans in place to remedy them. 

According to a report by legal insights consultancy CapitalXchange:

“Consideration of financial position and prospects procedures (FPPP) is critical in determining your company’s suitability for listing. You will need to have established systems, controls and procedures to enable you to achieve this. Your reporting accountants will need to prepare a private report on the company’s FPPP as part of the IPO process.”

It’s important to know that any sign of poor financial control or a lack of visibility over the internal and external factors that affect your company’s performance may result in a lack of interest from investors – or a failure to list at all.

Identifying key metrics

Your advisers and potential investors will want to know how you manage your company’s operation, including key metrics. This is data outside traditional financial information that allows you – and your investors – to monitor the company’s position and performance. Successfully identifying and managing these requires significant visibility and control over the data in your business – and the ability to use that data to forecast, scenario plan and manage ongoing strategy.

Preparing financial projections

You will be expected to show accurate financial projections, usually for at least 18 months out from the date of your IPO. According to accountancy and tax specialist BDO, these projections need to be ‘suitably detailed and capable of being easily flexed for sensitivity analysis.’

NOTE: Agile sensitivity analysis requires access to real-time accurate data. Finance teams that take many hours or even several days to conduct this analysis will not meet investor expectations. 

Reporting as a listed company

Once your listing has been successful, you have ongoing reporting requirements. You may be required to report your financial results quarterly – but certainly twice a year: at your half-year point and at the end of your financial year.

These financial statements must be independently audited and comply with standards like IFRS. You will also be required to report any material financial changes or considerations which may affect the nature of the business and therefore have an impact on your value for investors.

To manage these requirements, you must make sure that you have the right procedures for reporting appropriately, which includes your approach to forecasting, scenario planning, sensitivity analysis and cash optimisation, for example. 

How can we help?

Planning for an IPO is a complex and involved business. You need to be thinking several years ahead to make sure you can put your business in the best possible position to succeed.

In terms of your finance team and the procedures it operates, now is the time to put technology in place that genuinely supports your ambitions. Our QSF Plan & Insight tool is an essential tool both for preparing for IPO and for running a successful listed business.

Collecting data from across the whole of your business, it allows you to set the covenants and KPIs that are most useful to you, and delivers instant sensitivity analysis and scenario planning based on real-time data – including external factors like currency changes, inflation and other market influences.

We can help you transform the way your finance department plans, forecasts and reports – contact us today to book an initial call.

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