Should I stay or should I grow?
Five considerations before taking your company public, by Greg Morris, CEO: Sebata Holdings.
There comes a time during a business's life cycle when it needs to access more money. Reasons for this may include executing an expansion strategy, accessing working capital, acquiring another company, increasing liquidity, or even improving the business's attractiveness to potential talent and new shareholders.
Supposedly, the logical next step is to take the business public by listing it on a stock exchange. Often, though, businesses underestimate the time, cost and processes involved, says Greg Morris, CEO of Sebata Holdings.
If you're thinking about listing your business, there are a few things to consider.
1. Can you afford it?
You have to spend money to make money, and listing a company is not cheap. The various fees can add up quickly. They include:
* Admin fees. Documentation fees for listing on the Main Board or the AltX of the JSE amount to over R80 000, excluding the cost of compiling the documents.
* Listing fees. A number of factors determine the monetary value of securities, including the method and complexity of the listing. To give you an idea, a business with a market capitalisation of R2.5 million can expect to pay a listing fee of about R1 400. This increases to R311 000 for a R1 billion company. For a more accurate calculation, check out the JSE's listing fee calculator.
* Annual fees. These depend on your business's market capitalisation and other factors. A company with a market capitalisation of R550 million can expect an annual fee of about R228 000.
* Ongoing fees. Compliance costs, financial reporting costs, communication costs and consultants' fees are some of the recurring fees associated with listing.
* Once-off costs. Due to strict listing and regulatory requirements, you may need to invest in additional management systems and resources, and ensure more rigorous application of compliance controls.
Here's the rule of thumb: The financial benefits of listing must outweigh the costs of operating as a public company.
2. Have you gathered your army?
You can't do everything yourself. In fact, the JSE requires businesses to appoint a team of skilled and experienced consultants to manage various aspects of the listing process.
* Sponsor, to advise on the requirements and responsibilities of your directors, and to serve as a liaison between you and the JSE.
* Adviser, to co-ordinate the listing process and to advise on the method, size, terms, timing and pricing of the listing, as well as potential demand for shares.
* Accountant, to compile a pre-listing statement and handle financial reporting. Your accountant must be registered and independent.
* Transfer secretary, to manage the member register, issue share certificates, register transfers and mail circulars.
Other consultants may include PR managers, printing companies and a technical adviser if you own a mineral company.
3. Do you have a plan?
It's one thing to know why you're listing, but after doing so, you need a solid long-term strategy that outlines your growth drivers and how you'll use the raised capital. Investors are ruthless and will dig into every detail, so be specific, be honest and manage expectations upfront.
Companies often make two avoidable mistakes when listing: mispricing and timing. Both are the result of poor planning.
When it comes to pricing, businesses may oversell themselves based on past successes, making it hard to find value for money. They may even inflate the price of the business, but be left trying to justify that value as investors are aware of what's in the bank. This leaves both parties disappointed. So, don't be greedy. Price the deal right and sell the future.
In terms of timing, a business may have a convincing growth story, outlining what it hopes to achieve or highlighting its growth potential as a result of increased funding. But at the time of listing, it may have very few operational assets under its control. Acquisitions can take a lot of time, and the value of the share may plummet without assets to carry the value.
Spend time on the finer details. Don't let your adviser take the wheel completely. Own the process and have the final say, because you know the business better than anyone.
4. Are you ready to hand over control and privacy?
Private companies do not need to disclose their financial information. They also have quick-mover advantage because shareholders are generally involved in the management of the company, so goals are often aligned. They aren't answerable to shareholders and, if under financial duress, they can avoid the erosion of customer and stakeholder confidence.
The minute you take your company public, you lose some autonomy, agility and privacy. Listed companies are obligated to publicly disclose everything, from quarterly financials and directors' packages, to share dealings and Broad-Based Black Economic Empowerment credentials.
Before key decisions are made, listed companies need to gather input from all shareholders, which can and often does slow down the process. They're constantly under the spotlight and the smallest thing, like being remotely associated with someone else's crisis or a careless CEO tweet, can send shares tumbling and cause reputational damage.
5. Is your team on board?
A public listing could severely affect your business's culture. Increased governance and reporting requirements will naturally affect internal systems, as well as legal, HR and financial processes, and the teams that manage them.
While business growth is the ultimate goal of listing, the business owner is often accused of "selling out". This is why it's crucial to have a supportive and aligned management team who can filter the same messages down to employees.
The upside is that listings can incentivise staff via share options and equity participation!
When in doubt...
If you're apprehensive about anything, err on the side of caution and either don't list or delay the listing until you are completely sure that you have your house in order.
Yes, a listing unlocks public market funding to take your business forward and is a good option if you're a growing business with an interest in further acquisitions. But if yours is a mature business with low growth prospects and limited time and resources to invest in a listing, there are other options to lock in your investment.
For more information about listing requirements, please see the JSE's guidelines.