Q: My manufacturing business has grown steadily through the years, and I think it’s ready for the next step, which is expanding my factory and facilities. Because of that I’m interested in taking my company public through an IPO (initial public offering). What are the things I should know before I do this?
A: Doing an IPO means you are going to raise capital from the public by selling a portion of your ownership in the company for an equivalent amount of cash. Becoming a public company means you will have to disclose all the relevant information about your company’s operations, including its latest financial results and expansion plans to the public. It is like having the general investing public as your partner in business, who will praise you when you are doing well or punish you when you do not perform according to their expectations.
There are many benefits that you can enjoy as a public company. One is that you can have access to cheaper capital when you need money to expand your business. You can raise additional capital by issuing more shares in the stock market.
The additional funding you will get from the public is interest-free; you will not be obliged to pay the public for the capital because they share your risk in the business. The only thing investors will ask from you is to do well by delivering the earnings target that you promise to them. When you perform well by increasing your company’s earnings, the value of your stock price also goes up, and that’s how they will make money from their investment. Of course, you cannot always issue shares whenever you need money, because this will dilute your ownership.
Your company can also enjoy increased exposure and prestige by being publicly listed. It will be easier for you to transact with banks, customers, suppliers and potential partners because of your added credibility and visibility. You can also use your listed-company status to attract and retain promising employees by providing them stock options as an incentive. You can award your employees the right to buy company shares at a huge discount to the market price whenever they reach a certain milestone. For example, you can award stock options to employees who have stayed in the company for X number of years. You can also award them to managers who have achieved the company’s earnings target. With stock options, you can attract promising candidates from universities—and even your competitors—to join you, thus boosting your business competency.
To apply for an IPO at the Philippine Stock Exchange (PSE), you need to have at least one year of operating history prior to listing. It is preferable that you report a net profit, although this is not specifically required. You must be able to convince the PSE that your company can potentially demonstrate superior growth in the future. You need to explain how you envision your company’s growth in the next five years. You need to identify your strategies and plans and how you intend to translate them to future earnings. Once you become a listed company,everything will be focused on earnings growth, because earnings will be the key factor that will drive the value of your share price. The higher your earnings, the higher your share price should be. The PSE wants to make sure that your company is able to deliver the earnings that you promise, and provide opportunities for investors to trade your shares and make money. Before you get too excited for the IPO, you need to prepare your financial records.
Do you prepare them regularly? Do you keep all the supporting documents that support your financial preparation? Do you have a reliable internal control policy? Your accounting needs to be organized properly, as a PSE-accredited auditing firm will examine your financials. If you don’t have these statements yet, hire a qualified accountant and consultants to help you. Once you are ready, you can hire an investment underwriter to advise and help you prepare for your IPO.