Is your company ready for an IPO?

The recent buzz created by a slew of successful IPO launches locally and overseas has prompted many others to pursue a similar path. News have emerged of companies shopping for investment houses to back their debut or relisting on the bourse while other privately-held firms ponder the potential of going public.

There is certainly an allure for entrepreneurs to try and take their businesses to unicorn status through an IPO.

However, an initial IPO success does not guarantee solid performance in the aftermarket. A rush to market before a company gets its fundamentals down pat may spell disaster for a company, often underperforming at the end of the initial frenzy of the “lock-up period”.

First impressions matter and seasoned investors and underwriters may become weary of companies who fizzles out after the initial sizzle, making a relisting attempt later on much more challenging.

So, what are the signs of a company’s readiness to join the ranks of blue-chip companies on the local bourse?

• Differentiated Business Model

Companies with a unique business model and an attractive product or service makes for an attractive investment option.

Their differentiated business model or unique approach in solving a business or consumer need gives them a competitive advantage over their peers, allowing them to lead in their particular niche.

First-movers are generally favourites, but a late-comer with a better business model which can close the gaps left by its peers also stand a good chance of succeeding.

Case in point, Grab’s understanding of SEA markets secured them the dominant position in the regional ride sharing space, triumphing over Uber’s plug-and-play Western-centric business model.

Business disrupters who have proven their ability to upend the status quo to find a footing even in crowded markets tend to fare well.

• Addressable Market Size

However unique a product or fantastical a service, a business cannot succeed if there isn’t enough demand.

Companies eyeing a spot on the public listing will need a sizeable or growing addressable market demand for its products and services to maintain the kind of revenue streams befitting a company on the coveted marketplace.

For Main Market listers on Bursa Malaysia, they would need to have an aggregate profit after tax of RM20 million, while ACE (Access, Certainty, Efficiency) Market listers should have a paid-up capital of approximately RM5 million to RM10 million.

Hence, there would need to be a sizeable potential market for these businesses to service if their financials are to qualify for listing consideration.

• Established Track Record

Track record is often used as an indicator for potential success, showing the effectiveness of the company’s business model in generating strong and sustainable topline revenue growth.

While historical performance is no guarantee of future earnings potential, it is still a strong gauge of a company’s potential, showing the effectiveness of its financial, operational and compliance controls.

Depending on which market the company lists on though, there is some flexibility with regard to a company’s operating track record and profit requirements.

• Transparency and Compliance Measures

Companies moving towards the path of IPO needs to have solid recordkeeping and accounting, with strict and robust policies and frameworks of internal controls to prevent fraud and mismanagement.

This includes codes of conduct governing employees and third party contractors, whistleblowing and other reporting channels and terms of references regulating the established functions of the Group.

In effect, IPO companies need to put in place a formal process of corporate governance with oversight from the Board of Directors to ensure alignment of the company’s practices with the securities commission’s and the bourse’s market listing requirements.

• Competent Senior Management

Leaders of public listing companies can be held to account for their conduct within and of the companies.

Hence, it is important to have a team of qualified executive personnel who have the experience and track record of leading companies to profitability while adhering to the rules and guidelines of public listed companies.

Senior management’s profiles and credentials will be open to scrutiny by shareholders and the investing public, which is why some rearranging of top tier officers may be necessary to ensure a company is ready for the rigours of public listing.

Companies that are deemed ready for IPO have usually gone through the teething challenges of early and mid stage growth where most of these would be ironed out.

They will have mostly exhausted their mid-cap fund avenues from angel investors, private equity, venture capital, loans and credits during the expansionary phase.

Beyond a certain size, it becomes more prudent for the company to push forward with listing to gain access to a larger pool of capital from institutional investors, local and foreign, as well as everyday investors, which will assess a company on these and other factors to determine its viability for inclusion in their respective investment portfolio.

All these will be detailed in the company’s prospectus during the company’s IPO process, which can be a long an arduous journey through which a company will weigh its strengths and weaknesses, streamlining its people and processes to ensure its ability to compete effectively for a slice of the public’s investment capital. 

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