Things to Consider When Listing a Company on the Stock Exchange
The decision to list a company on a Stock Exchange is one that requires careful preparation and consideration on the part of the business owner. The process of listing a company is known as an initial public offering. When a company lists, it is valued and additional shares are issued which can be traded on a Stock Exchange.
You may decide to list a company for a number of reasons, such as:
- Positioning the company for expansion into other markets (both nationally and internationally)
- Making it easier to access new capital through public offerings
- Giving shareholders an easier way to sell their shares in the company and having better access to capital management opportunities to pay off debts
- Creating a measurable and transparent valuation for the company
- Giving the company higher credibility as well as greater visibility (given the disclosure requirements for listed companies)
Before listing your company, you need to be 100% positive that you definitely want to do this as not only is the initial public offering process a costly one, but it is also time consuming and one that you cannot afford to get wrong.
It is very important that when you want to list a company on a Stock Exchange that you seek advice from your lawyers, accountants, financial advisors, and other consultants to ensure that it is appropriate to list the company and that the correct steps are taken.
Some of the important positive and negative considerations of listing a company on the stock exchange include:
Positives of listing a company on the stock exchange:
- (i) easier to raise capital through a new share issue
- (ii) easier to sell shares to third parties through the Stock Exchange than trying to sell shares in a private company
- (iii) easier to expand by buying businesses as it is easier to use shares as equity for purchases
- (iv) the company brand is enhanced as a listed company rather than a small to medium private company
- (v) it can be easier to obtain and retain quality staff given with the enhanced status as a publicly listed company
Negatives of listing a company on the stock exchange:
- (i) major decisions cannot be made informally but require a longer bureaucratic and less flexible methodology (e.g. board meetings)
- (ii) increased compliance costs, including additional disclosure and accountability requirements
- (iii) higher risk of hostile takeovers as other investors are attracted to buy large stakes in the company
- (iv) the share price is subject to stock market fluctuations beyond the control of company management, which can cause the value of the company to drop against the company’s wishes
The Process of Listing a Company on a Stock Exchange
In a broad sense, the steps to list a company on a Stock Exchange are:
Step one
Appoint a consultant to prepare the paperwork for the initial public offering
Step two
Decide on the terms of the initial public offering and prepare disclosure documents for the initial public offering
Step three
The consultant then organises for the registration of the company with the Stock Exchange
Step four
Initial discussions begin with potential investors using managed fund investors to test the waters
Step five
The consultant helps to determine the price of the stock
Step six
The company lists and is traded on the Stock Exchange, with share price subject to market forces
Before listing, there are a number of matters that you and your management team need to consider including:
- What gaps are there in the skillset at the management and board level of the company? Can these be resolved with a listed company?
- Is the management of the company ready for the greater disclosure, accountability and transparency requirements after the company is listed?
- Is the company’s culture ready to be a listed company?
- Does the company have any issues with tax?
- How will key employees and key customers respond when they learn the news — will they stay on with the company?
- What other initiatives need to be considered (such as other acquisitions) before the company is listed?
- What systems (such as financial, operational and management) need to be improved before the company is listed?
- Are all corporate governance practices properly in place?
- Is the timing right for both the company and the market conditions?
When making the decision to list a company on the Stock Exchange, it is critically important that you obtain advice from all relevant consultants involved in listing the business.
If you do not take the right steps and heed advice during this process, it is more than likely that the listing of the company will be a disaster and cost you dearly without achieving anything.
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