The IPO market is booming off the back of strong market conditions induced by, among other things, a low-interest rate environment and COVID-related government stimulus.

According to the ASX, in the first six months of 2021, 85 companies joined ASX's official list, raising $3.5 billion of capital and listing with a combined market capitalisation of $22.8 billion. This is expected to be eclipsed in the second half.

IPOs are naturally an exciting time in a company's evolution as they give the company a greater public profile and all-important access to the public equity markets. However, alongside the excitement comes a certain degree of risk.

Good preparation can, however, mitigate those risks somewhat.

So what can organisations do to enhance their chances of success during an IPO? Our top 10 tips can help organisations prepare.

1. Ensure your forecasts are accurate through robust budgeting

The ability to market the IPO will depend on the forecast being attractive. However, the company and those involved in preparations for the IPO may face reputational damage (at best) and liability (at worst) for missed forecasts.

The key to quality IPO forecasting is a robust budgeting process. If your process is currently lacking, fixing that should be a priority.

It is important to realise that an IPO forecast is prepared for a different purpose to a budget.

The forecast will both sell the IPO and attract liability.”  

The budget is an internal management tool (and, may for example, include aspirational stretch targets). Identifying the changes that should be made in building the forecast (relative to a budget) is important. Getting an early handle on these factors will help you to hone the forecast.

Companies need to have a sophisticated and detailed financial model ready. If this is not currently prepared, companies should at least build a preliminary model.

Finally, it is important to understand the legal parameters associated with forecasts.

In particular, the IPO prospectus may only include forecasts that have reasonable grounds. This means that there must be a sufficient objective foundation for the statement. Companies seeking to IPO should obtain advice on how to ensure that their forecasts have reasonable grounds, and that the assumptions underpinning them are not hypothetical.

2. Confirm your new Board's composition

The relationship between the board and management will be critical to success as a listed company.

Consider the following:

• Which members of the current board will remain post-IPO?
• Which members will not continue after the IPO is completed?
• Are new board members are required? Does the board as a collectively have an adequate skill set – including public company and industry experience? Are there enough independent directors and is there enough diversity in all its forms?

If new directors are required, appointing these directors at a reasonable period in advance of commencement of the IPO will make for a smoother process.

3. Provide thorough information

Your advisors will undertake comprehensive due diligence across commercial, legal, financial and accounting and taxation.

In addition to the financial model, an IPO candidate should fully populate a virtual data room with all material information about, and corporate records of, the company. This is an easy way of avoiding a common delay at the start of a process.

A successful IPO is, to some extent, dependent on timing, so delays can be the difference between being listed or not – so they are best avoided!

Collating this information can also give you an early heads up about tricky due diligence, disclosure or deal issues. For example:

• Does the company own assets which are a shareholder's personal assets and should be 'restructured out'?
• Does the company own or have the rights to all of the intellectual property and software that it needs to run its business?
• Are there any material contract renewals that will occur during the IPO offer period or the forecast period?

This early notice may enable you to easily resolve any issues and avoid an inconvenient disclosure.

4. Develop your 'equity story'

Another key element in marketing your IPO will be honing the IPO candidate's 'equity story' – that is, the reasons why its shares are a good investment.

An easy way to get a head start on this is to do some research on the company's competitors and prepare information which distinguishes your company from them. For example, is your product or service more versatile? Do you have a bigger market share? Do you have exclusive arrangements that provide an advantage? Do you have a better track record of M&A or weathering downturns?

On the flip side, ensuring that the company's risk register is up-to-date is both good governance and will help in drafting a robust risk factor section of the prospectus. If your risk management processes need some optimisation, seek advice about it well ahead of the commencement of IPO preparations.

5. Ensure your remuneration meets ASX requirements

Investors will be interested in management's remuneration package (i.e. that senior management is not over-paid but also adequately incentivised).

The board should consider getting some early advice – at a minimum, benchmarking information – from a remuneration consultant.

If you leave go-forward (post-IPO) package agreements too late, you may face a deal risk. These should be largely agreed by the time the IPO process starts.

ASX now scrutinises equity incentives much more closely than ever before. IPO candidates need to ensure that even their pre-IPO awards meet ASX requirements (if they will remain on foot post-IPO). You should attend to this early in case it is necessary to get employees to agree to changes.

6. Develop a robust governance system

Listed companies need to have robust governance systems. Investors generally expect IPO candidates to comply with all the ASX Corporate Governance Council Principles and Recommendations (even if they are not mandatory).

Learning to live with governance regimes that will apply post-listing for a period before the IPO preparation process begins can help to avoid mistakes after the listing. It will be helpful if you implement clear reporting lines, expectations and delegations of authority, as well as governance training programs.

Finally, 'ESG' has gone from a buzz word to a making the difference between whether the capital markets will support your IPO or not. Getting up to speed on the rules and reporting in this area can not only guard against liability, but can also add value.

7. Obtain stakeholder buy-in

All of an IPO candidate's stakeholders will be interested (and affected differently) by its IPO. What a company can say publicly about its IPO before lodgement of a prospectus is very limited, so most stakeholder management occurs after that point.

However, having buy-in of existing shareholders will be key. Review your company's constitution / shareholders' agreement to see whether the company can compel co-operation. If these rights do not exist, the company should explore whether an agreement can be put in place.

Flagging early matters such as sell down and post-IPO escrow (and the need to enter into legal documents in connection with these matters) can avoid surprises later.

In relation to other stakeholders, you should identify them early and develop a plan to mitigate any adverse reaction.

8. Adopt a suitable corporate structure to protect vendors against liability

If the IPO will involve a sell down, there are some common structures which protect the vendors against liability. See A Guide to IPOs and listings on the Australian Securities Exchange for more information.

Which structure is adopted depends on the tax and accounting implications. The analysis, to be undertaken by your lawyers, accountants and tax advisers, should start around three months before the commencement of the IPO transaction.

9. Appoint appropriate resourcing to support your IPO

Appointing an IPO project manager – typically a former investment banker, accountant or lawyer who has experience with IPOs – will make a material difference to the ease of execution of an IPO.

The roles of the CEO and CFO change markedly following an IPO. A significant proportion of their time will be devoted to investor relations. Consider appointing personnel to assist with the business (e.g. a COO or finance manager) or with investor relations.

The company will also need a company secretary, ideally with listed company experience. This person should be recruited around the time of the commencement of the IPO transaction.

10. Lodge an application for suitability

The first step in the IPO transaction process will be lodging an 'application for confirmation of suitability for listing' with ASX.

Companies intending to list should familiarise themselves with the information required for this and start its preparation just prior to the IPO transaction commencing.

An early start to planning is key for companies thinking about an IPO down the track. There are a range of easy steps that can be taken in the 12-month period leading up to the IPO preparation process that set up the company for a successful IPO and life in the listed environment.