We all know that there are certain criteria for a private owned company to achieve the status of a public listed company. This status separates smaller companies from the big players. In this article, we will provide the general requirements that a private owned company to have before it should even consider going for the IPO exercise:-

1. Potential growth

The business must be able to justify the growth pattern, not only in sales, but the market as well. The growth can be by way of horizontal or vertical integrations (expansion in supply chain), or market penetrations (territorial expansion), or even market share. From the practical point of view, the potential growth should be for the next 2 to 3 years from the start of the IPO exercise.

2. Financial track record

The company needs to show positive historical trend of at least 2 to 3 financial years before embarking on the IPO exercise. Therefore, as many companies have tendencies to architect their financials for the tax planning purposes, such focus may not be favourable for public listing purposes.

3. Good management team

Profile of the management team is very important as they are the persons who created the results and achievements of the company until todate. Therefore, their track records are reflected in the track record, and it gives huge confidence to the authorities and investors that their growth forecasts are achievable.

4. Good supply chain

In most businesses and industries, the companies depend on suppliers and customers to ensure sustainability and growth. With this general understanding, the company going for IPO will be more attractive to investors if they have involvement in more sections of the supply chain. Example of upstream supply chain like the supply of materials or services to the company going IPO, or downstream supply chain in the distributive demand to customers.

5. Benefits outweigh costs

At the onset, the shareholders of the private owned company has to understand the fact that being a public listed company means diluting their shareholding, hence releasing certain level of control in the company in exchange for fund injections into the company for its growth plan. Further, such IPO exercise would also require substantial upfront costs as advisers’ fees and expenses. Therefore, the owners and management team of the company must understand and weigh the benefits of IPO against the costs, to decide whether to proceed with the exercise.

6. Investor favoured industries

Timing of going for IPO is also crucial to the company in order for it to achieve the biggest level of benefits, which is mainly on the company valuation. For example, at this moment, the Singapore and Malaysia investors favour very little on property development companies. However, UK and certain European investors are still positive towards such companies. We have to identify the markets where investors are most favouring industries where their companies are within.

This is Part 2 of the 6 part series in “Initial Public Offering” knowledge articles written by KL Management Services. To find out more about IPO and how your company can start looking into it, kindly contact us.