Australian IPO Review 2022: Readying yourself for a change of season

Following a slower year for IPOs in 2022, potential IPO candidates may be sitting on the sidelines waiting for a change of season and more buoyant conditions. However, time on the sidelines can be effectively used in preparing for an IPO to maximise optionality and hit the optimal IPO window. This article touches on some of the steps potential IPO candidates can take to make sure they are IPO ready.

What are your marketing messages and how are they supported?

Consider the key selling messages you plan to use in marketing your IPO and ensure these can be supported.

For example, if your growth story hinges on expanding into a new geography, market or product line, make inroads into the opportunity. Showing early success and some trading history will de-risk the prospects of successful growth for investors and maximise your valuation.

If you are an early stage business on the path to profitability, think about the key milestones the business needs to achieve desired revenue or profitability targets. A track record of delivering promises on time and hitting your milestones will demonstrate the capability of the management team and promote trust with investors. Having a clear path to profitability with milestones to achieve it is also an important consideration for public market investors.

If the company has recently acquired a business, consideration should be given to how long it will take to properly integrate it and realise cost or revenue synergies, and how easy those benefits can be forecast for use in your IPO prospectus.

If you plan on marketing ‘contracted revenue’ or something similar, make sure the contracts bear this out, not just in terms of the way pricing and volume provisions work, but with respect to the ability of counterparties to terminate early.

Does your board and management team need to be supplemented?

The board and management team are incredibly important, not just from a marketing and regulatory perspective, but because of their importance to the IPO process. You should consider the need to supplement your board or management team early. Hiring a key member of management can take time, as can identifying board members with appropriate skills and cultural fit. Leaving this too late can impact your IPO timetable, whereas getting on to it early can mean identifying the best candidates, and allowing them to get up to speed before you start your IPO process, which will maximise their contribution.

Your board will need to meet ASX’s corporate governance requirements. At a minimum, this means all directors will need to be of “good fame and character” (a requirement which also applies to the CEO and CFO) and that the board includes some directors who have experience directing or managing a listed entity. Beyond this, ASX has recommendations around board and board committee composition, some of which become mandatory for entities that will be included in the S&P/ASX 300.

Companies which do not meet the recommendations have to disclose this fact, along with the reasons why, in their prospectus and annual reports, which may be viewed negatively by investors or proxy advisors.

As an IPO candidate, your management team (and in particular the CEO and CFO) have to be competent not just at running the business, but also dealing with public market investors (both during the IPO process and after it). Having some listed company experience within the management team can be helpful in this regard (although it is not critical). You will also need to consider whether terms of employment for key management members are appropriate for a listed entity, and whether any employee incentive arrangements are fit for purpose – investors will want to know the management team is incentivised to deliver strong performance, however there is a regulatory overlay too and the advice of remuneration and legal consultants may be required.

You may also want to think about your increased regulatory burden post-IPO, and the potential need to build out your general counsel/company secretarial function.

Furthermore, IPOs can be time consuming processes, and bringing on an extra set of hands early can be helpful to minimise disruption to the business caused by the IPO process.

Are your business systems IPO ready?

Having accurate and timely access to the financial results of your business on a granular level is critical for you to hit your IPO timetable, and to meet your reporting obligations post-IPO. Being able to prepare detailed financial forecasts in a timely way with detailed assumptions (which require a reasonable basis) may be critical to your IPO marketing, and being able to track performance against the forecast as your IPO process is occurring and understand discrepancies is critically important.

You should spend the time early to understand what prospectus financials you need, as well as your post-IPO reporting obligations (for example, will you need to prepare quarterly reports), so you can ensure your accounting infrastructure is up to the task.

Have you got the boring stuff right?

There is a lot you can do in the lead up to an IPO to make the process run as smoothly as possible, for example:

• thinking about the IPO when agreeing confidentiality and change of control clauses in contracts;
• keeping your share register and capital structure up to date and as simple as possible;
• ensuring any shareholders’ agreement or other equity capital documents (such as preference share terms, convertible note terms or anti-dilution arrangements) will facilitate (rather than hinder) an IPO;
• ensuring all your key documents are filed in an accessible way; and
• thinking through any required pre-IPO restructure early.

These steps will stand you in good stead for the IPO due diligence and preparation process.

Is your business sufficiently mature to IPO and are you prepared for life after listing?

Whilst being a listed company can be very positive (for example, through the enhanced profile, simplified and greater access to capital markets and a liquid market for shares), it has its drawbacks too. This includes enhanced scrutiny (both from media and regulators), increased costs (for example, listing fees and additional compliance costs) and the need to comply with the ASX Listing Rules. The latter can create unexpected problems for some companies (for example, where continuous disclosure obligations conflict with obligations of confidentiality to key counterparties).

You should consider whether now is the right time for listing, or whether staying unlisted for longer will serve the business better in the long run. You can get insights on this from your advisors and others who have gone through the IPO process.