When exiting a business, the owner must assess which method will be most favourable to them. This process involves deciding between an Initial Product Offering (IPO) or an outright sale of the business. In most cases, the top priority for the owner will be to extract maximum value. SI Partners’ new white paper examines the pros and cons of an IPO including the cost of IPO vs sale.
There are numerous intricacies to be considered when planning for an initial IPO. Some factors are external and thus out of control of the owner, such as investor sentiment. In other words, the prevailing attitude of investors. Ultimately, these groups or individuals dictate the value of the deal. Investors will evaluate the characteristics of the seller to identify their ability to create value. Strong revenue growth and above average margins are usually strong indicators to investors. Businesses that achieve double-digit revenue growth in the years prior to an IPO are, unsurprisingly, likely to accomplish maximum value.
An expensive route to higher valuation?
There are various benefits for business owners who choose to go down the route of an IPO. The main benefit is the potential to raise money at a higher valuation than on the private market, which makes it a lucrative option for owners. With that said, achieving maximum value is not always the first priority of the seller. For those looking to achieve a quick sale, the private route may be viewed as more appealing. The process of launching an IPO is often both expensive and time consuming. It also allows for less freedom, given that restrictions are often placed, typically for six months, on stock sales after the IPO. This is done to avoid price volatility with regards to the price of stocks.
Avoid administrative burden and mitigate market risk, but potentially relinquish control if you don't have the right growth partner
After assessing the pros and cons of launching an IPO, one may conclude that a private sale is more advantageous, however there are numerous pros and cons that also apply to this route. For instance, one of the advantages of a private sale is that the seller is less susceptible to market risk. On top of this, the seller avoids the regulatory and administrative burdens of running a public company, such as disclosure, forecasts, shareholders etc. On the other hand, as previously mentioned, the company could command a higher valuation in the public market. Furthermore, the seller relinquishes any control and management of the company, which may not be ideal for sellers who are emotionally invested in the company.
In general, whether or not a business decides to move forward with an IPO depends on the context of their own situation. There are a number of factors to be considered and the final decision will ultimately rest on what the seller wishes to achieve from the sale.