An Initial Public Offering (IPO) is a milestone event in the life of any Small and Medium-sized Enterprise (SME). It does not only guarantee access to capital, but also the increased brand credibility and expansion opportunities.
An Initial Public Offering (IPO) is a milestone event in the life of any Small and Medium-sized Enterprise (SME). It does not only guarantee access to capital, but also the increased brand credibility and expansion opportunities. Nevertheless, SMEs face numerous technical, regulatory and operational issues on the way to IPO. Any slight mistakes may lead to regulatory delays, investor doubt, or, in the worst-case scenario, the failure of the public listing. It is important to know these pitfalls and how to avoid them and this is where the services of an experienced IPO consultant come in.
Incomplete or inaccurate documentation is one of the most common errors that SMEs commit. Regulatory authorities such as SEBI (in India) or the SEC (in the US) demand extensive disclosures of business operations, finances, legal issues and risks. The failure to disclose or incorrect disclosure can not only slow down the approvals but also subject the company to fines or legal action.
SMEs occasionally underrate the significance of sound financial systems and reporting requirements that are required in publicly traded firms. Problems like un-reconciled accounts, inadequate internal audit procedures or failure to meet local and international accounting standards (such as Ind-AS or IFRS) may arise in the course of due diligence, damaging the reputation of the SME.
The regulatory maze may be complicated. Ignoring small compliance requirements, like industry-specific regulations, board composition requirements, or corporate governance standards, may put the IPO process in danger. Most SMEs do not customize documentation and procedures to the current regulatory changes.
An IPO prospectus is not just a compliance document, it is a marketing document. Most SMEs make the mistake of not clearly defining their business model, unique selling propositions and future growth opportunities. This may scare off prospective investors seeking clarity and assurance of the vision of the company.
Becoming a public company comes with increased scrutiny, on the part of regulators, investors, and analysts. SMEs who are not ready to answer hard questions about risk factors, governance and growth forecasts might not be able to gain market confidence.
The other fatal error is over-pricing or under-pricing the value of the firm, or the wrong time to issue stock. Being overvalued may scare away investors; being undervalued may lead to the raising of inadequate capital. The subscription rates and the reputation of the company can also be affected by poor market timing.
Lastly, other SMEs are in a hurry to undertake the IPO process without investing adequately in resources like legal, financial and internal control systems that would facilitate the smooth listing process.
Seasoned consultants perform comprehensive IPO readiness tests, including operational and financial systems. They check the gaps in compliance, recommend the enhancement of internal controls, and assist in standardizing financial documentation, significantly decreasing the risk of incomplete or missing filings.
A consultant also comes with new information on evolving laws and listing requirements. They mentor the SMEs to make sure that all the filings are complete, compliant and specific to the right regulatory framework- a process that needs expertise and attention to detail.
Consultants assist SMEs to modernize their financial reporting procedures and assist them to align them to international accounting standards. This will involve establishing effective internal audits, enhancing monthly/quarterly closures and transparency- which are some of the main requirements to gain investor confidence.
Consultants work with the management to develop a good investment story. They assist in condensing the vision of the company, business strengths and strategic roadmap into investor friendly stories to be included in the prospectus and investor presentations.
In addition to filing, consultants educate SME leaders on how to answer questions and regulatory scrutiny by investors. They assist in establishing formal investor-relations departments to deal with continuing questions, disclosures and communications, which is critical to maintaining investor confidence after listing.
Consultants can recommend the best valuation and time of the IPO by studying the market conditions and comparing with other similar listings to ensure the floatation is successful and well received.
An IPO is not only a financial event but it is a change in the culture, reputation and market position of the company. Although SMEs might consider the process to be daunting, it is possible to avoid the pitfalls with the help of experts. Hiring an expert IPO advisor does not only reduce risk but also greatly increases the chances of a successful, value-creating initial public offering.