Many entrepreneurs see an IPO (Initial Public Offering) where the company’s shares are floated on a stock market as a desirable stage in their company’s development.  There are several reasons for this as having a stock market listing gives a market determined valuation, an exit route (especially if funding has been raised from external investors) and a level of status.  Generally it leaves the current management team in control of the company.

Over the last two years I have been involved in helping two companies prepare for their IPOs.  A key feature of this is being able to demonstrate that the company has the processes in place to comply with its obligations as a listed company.  This has to be demonstrated to the sponsoring broker who will ask the reporting accountants to check the processes.

The best starting point is to compile a risk register detailing all the significant risks (that will be) faced by the listed business together with how they are mitigated by the controls that the company has in place.  In some cases the control environment will need to be enhanced to deal with the new environment that the company will be operating in.  A common area for enhancement will be the need for monthly management accounts, prepared on a consolidated basis (covering all the companies in the group) under international financial reporting standards (IFRS).

The key risks and how they are managed are documented in the Financial Position and Prospects Procedures Memorandum (FPPP).  This will develop into a significant document which will go through multiple iterations, before being approved by the board.  The reporting accountants will review the FPPP in detail and seek evidence that the controls mentioned are operating correctly.  One of the key controls will be structuring the board correctly with the right mix of executive directors and NEDs.

In addition to the risk register and FPPP, a working capital plan will be required to demonstrate that the group has sufficient financial resources to operate for at least twelve months after the IPO.  Sensitivities will be run on this showing that even if everything does not go to plan, the company is likely to continue in operation.

Other activities that will require significant management effort will include building demand for the shares, in which they will be assisted by the broker and PR, compiling the historic financial information (HFI) covering the last three years audited financial information prepared under IFRS, drafting the admission document or prospectus together with conducting the legal due diligence.

It is highly likely that lock-ins will need to be obtained from existing shareholders where they agree not to sell their shares for a period of time in order to ensure that there is an orderly market following listing.

As part of the floatation project, the tax position of the group will be reviewed.  There may be opportunities here to enhance the group’s tax position and there may also be a need to tidy up some of the existing practices to ensure they are compliant with being a listed company.

As with any major project, do not underestimate the time and cost of all this work, or the potential disruption to the business, and ensure that you bring in appropriate additional resource.