A company founder or CEO trying to raise additional capital, either by way of equity or debt, has three options of doing so: first, by securing bank loans, preferably long-term loans; second, by seeking funds from cash-rich individuals (relatives perhaps) or institutional investors; and third, by selling 20% to 25% of the company's shares by way of an IPO (initial public offering). The latter appears simple and it is.
Assuming you've decided to do an IPO, here are the basics:
Assess realistically the debt-carrying capacity of your company. Review the impact of the planned IPO on the possible share dilution of existing shareholders. Review thoroughly your business and growth prospects. Do they have favorable economics? Are they sustainable? What’s your standing within your industry? All these should be factored in as you transform your company into a publicly-listed one.
In addition, you must have a compelling and credible business plan along with compelling story on
why you’re selling shares to the public. Your company's ratios like your projected P/E (price-earnings, revenue estimates, and other vital numbers on sales, production, operational costs must be credible, realistic and justifiable. In all likelihood, investors will raise questions on these over and over again: What are you going to do with the funds you'll generate in your IPO?
The success of an IPO depends, as observed, largely on the coherence and credibility of your IPO story. One major reason why some companies fail to raise as much equity capital is traced to their failure to convince investors there’s “gold in the mine” in their IPO story. Put it this way, a well-prepared business plan, crafted with the assistance of your experienced investment bankers, is a major selling tool in any IPO drive.
In an IPO, timing is always crucial. Avoid coming out with an IPO offer price that may be high at a time when the market is soft like what’s happening now . Check the market's mood. Is it bullish or bearish?
Are share prices rising or falling? Is the trading volume up or down? What’s the investor's sentiment?
You could certainly minimize some risks if your IPO is launched at the most appropriate time.Equity market is sending ambiguous signals now. It may take sometime before investors really start to sit-up and take notice.
Global growth is slowing and the world economy is reportedly headed for a recession in 2019. Most of the world's major economies outside the United States showed clear signs of slackening growth in the fourth quarter of 2018. But strong start to the US earnings season, along with trade optimism and hopes of a slower pace in the Federal Reserve's interest-rate hikeshave helped S&P 500 recoup some of its losses from recent rout. Trade wars are also seen as danger, noting that tariffs are bound to hurt markets. Still, most economists are hoping it will be a soft landing rather than outright recession.
No one can anticipate when surprises occur, or when investors' “Black Swan” will suddenly appear in the business horizon. Arguably, worries about recession, inflation, capital impairment of major banks, political crisis, currency uncertainties may cause major distortions in the global economy rendering investors to be more cautious going back into the financial markets.
When you’re confronted with a chicken-and-egg situation such as this, it helps to pause and recall the words of legendary investor Warren Buffet: “The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.”
Atty. Billy Cortez is an independent board director at First Metro Securities Brokerage Corp. and First Metro Equity Exchange-Traded Fund Metrobank Group. He is a former FINEX president and chairman of the country's Capital Markets Development Council.