Planning ahead for a potential IPO

When considering an lPO, it is critical to be able to articulate a clear equity story. The public investor community will heavily scrutinise the company, its historic performance and its strategy for the future, including the credibility of its growth plans. Your IPO valuation will ultimately be driven by a combination of market conditions and investor confidence in those factors.

When developing your equity story, key considerations include:

• the overall investment proposition
• business model and operations
• performance fundamentals 
• strategy 
• risks 
• sustainability  

You need to choose an appropriate exchange and regulatory regime.

The main market of the London Stock Exchange (LSE) offers a trading company the option of listing on its “Equity Shares - Commercial Companies” (ESCC) segment. This brings the badge of quality that investors associate with a London main market listing (as well as the potential for FTSE index inclusion), and with it enhanced profile and liquidity. It also incorporates additional flexibility in share structuring and other matters.

Businesses listing in London may also look to AIM, the junior market of the LSE, although levels of liquidity are significantly lower on AIM than on the main market.

The timetable for launching an IPO is driven both by the reporting cycle and investor availability.

Choosing the right time to list in your company’s life-cycle is a critical component to your equity story. In addition, a combination of your reporting cycle, the requirements of the relevant regulators, the due diligence requirements of underwriting banks and the availability of investors will dictate the “windows” during the year within which your IPO may be launched.

An IPO represents an important milestone not only for the business but also for your founders and major shareholders. 

Key issues that you and they will want to consider include the following:  

• selling existing shares on IPO 
• lock-up arrangements for existing shareholders 
• retention of control
• relationship agreement with major shareholders
• board composition and appointment rights 
• conflicts of interest 
• concert parties
• transitioning away from a pre-IPO equity structure
• relationship with other shareholders and members of management

Will you want to bring in pre-IPO investment and/or replace your current debt structure?

Your optimum capital structure may be impacted by many factors, including macroeconomic conditions, your current gearing and the general position of the equity markets, both in the UK and globally. Public market investors can often be more conservative in terms of debt ratios than, for example, private equity investors.

When considering these issues, a number of factors may be relevant, including:

• Do you wish to refinance existing debt? If so, what will the timing of the refinancing be? Will your new finance package be conditional/dependent on listing?
• Is there any merit in you undertaking a pre-IPO debt capital markets issuance, either in the form of a bond or a convertible bond?
• What do you anticipate the IPO proceeds will be used for? You will need to develop and stress test internal models to support your equity story.
• Do you have any shareholder debt and, if so, will it be repaid on IPO?
• What level of sell-down will existing shareholders be looking for on IPO?

FTSE indexation and achieving an efficient tax structure will be important goals, and should be considered early.

A key initial workstream in any IPO is to plan the corporate structure of the group to be listed. Important questions include which entity will be your listed company and whether you will get best value by floating the current group or whether there are any businesses that should be left out of, or brought into, the “lPO perimeter”.

Is index inclusion a factor?

One particularly relevant consideration will be the eligibility of the listed company for inclusion in the FTSE UK Index Series. Entry into an index can be highly desirable to assist marketing of an offer and to improve liquidity.

Getting the right governance structure in place is an important part of marketing your offering.

Almost all businesses will need to consider significant changes to their board and governance structure in the transition from privately-owned enterprise to listed company.

The UK Listing Rules require that an ESCC listed company “comply or explain” against the requirements of the UK Corporate Governance Code. To comply with the UK Corporate Governance Code, you will need to appoint a number of independent non-executive directors. 

The UK Corporate Governance Code also requires the establishment of certain board committees including an audit committee, remuneration committee and nomination committee. 

In addition, you should consider whether any other committees, such as a risk or disclosure committee, are appropriate to have in place.

It is essential to be well prepared for life after listing.

An IPO involves a transition to public life for which you and your directors need to be well prepared. 

You should ensure that, prior to your lPO, you have in place policies and procedures appropriate for ensuring your compliance with the following areas:

• corporate governance
• financial reporting procedures
• relationships with large shareholders
• continuing disclosure obligations
• cyber security/data protection

Incentives are a key issue on an IPO as investors will want to be confident that the management team generally are appropriately motivated to deliver the business strategy. 

One of the advantages of creating a public market in the company’s shares is that share incentives become a more tangible benefit for employees. 

Key questions to consider include: 

• How far down the organisation should employee equity participation go? Should it be limited to senior executives, extended to the next level of management or include all employees?
• What types of employee share incentives are currently used by listed companies and what do they deliver in terms of tax breaks and reward? What are the arrangements best suited to incentivise different levels of the organisation?  
• In terms of senior executives and management, how will their interests be best aligned with those of the new shareholders and investors? 
• Where are your employees based? If you have a global workforce, employee share plan design may be influenced by local tax regimes and legal issues. It may be possible to structure incentives to attract tax favourable treatment in a particular jurisdiction. 

Getting the structure of your financial track record correct is a fundamental first step.

The basic requirement for any London listing is for an audited, three-year IFRS financial track record (or such shorter period of time as the company to be listed has been in existence) on a consistent set of accounting policies. For many businesses, the presentation of the financial track record is straightforward. 

However, this can be more complicated or time consuming if:

• you completed a major acquisition within the three-year period (separate financial statements may also need to be presented for the acquired business)
• you have brought together two or more businesses into the IPO perimeter and need to create “combined” financial statements to present their track record as a single business
• you disposed of a part of your business within the three-year period and need to create financial statements that carve-out the relevant business unit
• the business you are listing was acquired out of a larger entity during the three-year period (potentially leading to mismatches in presentation for the pre- and post-acquisition periods, or even the need to prepare carve-out accounts for the pre-acquisition period)

If there have been significant changes to your business, pro forma financial statements will be required. Combined financial statements are also acceptable in appropriate circumstances.

The reporting accountants will also be responsible for other customary accounting due diligence of which the major items are:

• reviewing your financial reporting procedures and processes (procedures which enable you to report to investors on your financial position and prospects)
• a report on the sufficiency of your working capital model for 18 to 24 months following the lPO
• a “long form” report (a general financial and commercial due diligence report on your business)

Getting the right US securities law advice is a critical part of managing your liability and that of your directors.

The US continues to be the world’s largest source of capital, and a significant potential source of funding for listed companies. As a result, many companies, wherever they are seeking a listing, will want to market their offering to US investors.

Companies that want to access the US market but intend to list outside of the US will typically need to rely on one of the exemptions from the registration requirements of the US Securities Act of 1933 to offer and sell securities on a private placement basis in the United States. 

Both you and the underwriting banks will need to instruct US legal counsel to issue these letters, so engaging a law firm that is able to provide both English and US legal advice on an offering provides significant advantages.

You may want to preserve the option of other strategic transactions until a late stage.

While obtaining a listing may be the ultimate goal, our experience has shown the value of also being prepared for alternative outcomes, such as a full or partial exit through a sale to a trade buyer or a private equity sponsor.

This can be achieved by preparing for the listing in parallel with another potential transaction in what has become known as a “dual-track” process.

Typically, a listing is run alongside a sale process, which can help to increase competitive tension among bidders in the sale process and negotiating power with investors in the lPO process.

Appointing an experienced advisory team is critical.

If you are looking to list in London, you will need to appoint an investment bank to act as “sponsor” for an ESCC listing (or as your “nominated adviser” in the case of AIM). 

In addition to underwriters and financial advisers, reporting accountants and lawyers (both for you and your sponsor and underwriters) will need to be appointed. Typically, accountants need to start their work four to six months before the date of listing, and the sponsor and legal counsel need to start their work before the reporting accountants so that the engagement letters and scope for the reporting accountants can be agreed.

In our experience, having a small core team of trusted advisers in place early in the process can be beneficial - we would work with you and your team to get you (and keep you) on the front foot throughout the transaction. 

We offer the capability, expertise and bandwidth of a major global full-service law firm with an approach focused on agility, innovation, pragmatism and responsiveness.

Our approach is firmly focused on keeping you ahead - through meticulous planning, proactive issue management, and strategic foresight. We aim to free up your management time, enabling you to extract maximum value from your other advisors.