An Introduction to SME IPOs

Small and medium-sized enterprises (SMEs) are critical drivers of economic growth and innovation. However, many SMEs face challenges in raising the necessary financing to expand their operations. An initial public offering (IPO) can be an attractive financing option for SMEs, allowing them to raise significant capital from public investors to fund their growth plans. But the process of going public also comes with considerable demands and scrutiny. This article will serve as a guide to help SMEs think through the IPO process and determine if pursuing an IPO is the right strategic move for their business.  

What is an SME IPO?

An SME IPO refers to an initial public offering undertaken by a small or medium-sized business to raise expansion capital. The key components of an SME IPO include:

• Offer shares in the business to public investors for the first time
• Price shares to balance meeting fundraising needs and investors’ upside expectations
• List shares on a stock exchange for trading, providing a new avenue for liquidity to shareholders
• Take on increased compliance obligations as a new public company in areas like reporting and governance
• Generally raise funds in the range of $10 million to $100 million+

The first thing to understand about IPOs is that there is no blueprint one-size-fits-all approach. Each business considering an IPO will have unique objectives, opportunities and challenges that impact the optimal way to approach the public markets. For example, some industries like tech and life sciences tend to attract higher valuations and more investor interest, leading companies to pursue IPOs sooner to capitalize on market windows, while others like manufacturing may wait until fundamentals are rock-solid. Some key factors to consider when determining if your business is ready for an IPO include:

Reasons a SME May Pursue an IPO

• Accelerate Growth – Raising expansion capital can help a business scale up operations rapidly during a window of market opportunity.  
• Equity Infusion – Issuing new shares raises equity, limiting the need for raising high-interest debt financing.  
• Investor Exit – Gives investors like founders, family offices or private equity funds a way to exit and monetize ownership stakes. 
• Capital Expenditures – Funding to support investments in infrastructure, R&D, real estate, machinery, etc. 
• Enhanced Visibility – Going public puts the spotlight on your company, bolstering visibility and credibility.  
• Recruiting Tool – Listing attracts top talent by enabling stock compensation and options.
• Acquisition Currency – Public stock gives you a “floating currency” to use in M&A. 

IPO Drawbacks to Consider

• Dilution of Control – Majority owners will have their stakes reduced, ceding some control.  
• Higher Reporting Burdens – More regulatory obligations and added complexity in finances.  
• Pressure to Meet Wall Street Expectations – Public company leadership teams are always in the spotlight, judged quarter by quarter.  
• Significant Initial Costs – Upfront IPO costs can reach 7-10% of funds raised.  
• Higher Cost of Capital – Firms often see their cost of capital rise substantially post-IPO.  

Criteria Investors Look for in an SME IPO

• Strong Management – A proven leadership team, preferably with prior public company experience.  
• Robust Growth – Solid revenue growth and an expanding addressable market. Usually 2-3 years of accelerating revenues.
• Path to Profitability – A credible path for the company to reach sustainable profitability. Venture-backed firms are expected to prioritize growth over profits initially. 
• Defensible Competitive Advantage – Something that differentiates you and prevents rivals from capturing your market share easily. 
• Appropriate Valuation – A valuation in line with public market comparables. For tech stocks this might be a relatively high revenue multiple given growth expectations.  
• Effective Use of Proceeds – Details on precisely how funds raised through the IPO will drive growth. 

SME IPO Process Overview

The process of executing an IPO has distinct steps and phases, and normally takes at least 12-18 months to achieve from start to completing the offering. 

1. Assemble the Right IPO Team  

Going public demands a diverse team of experts working in tandem throughout the IPO process. Key team members typically include:

– Investment Bank – Will underwrite (guarantee purchase of) shares offered, conduct valuation analysis, facilitate roadshows, coordinate book building, stabilize aftermarket trading etc.

– Legal Counsel – Provides guidance on IPO regulations and compliance, disclosure responsibilities, risk factor assessment etc. 

– Auditor – Reviews financial records and statements, performs required audit procedures to ensure accuracy and completeness.  

– Financial PR/IR – Handles investor relations, press releases and media communications before/after the IPO.

– Industry/Market Experts – If available, specialists in your sector or target geographies who deeply understand trends, end-markets and ecosystem dynamics. 

2. Conduct Pre-IPO Preparations

The pre-IPO phase involves intensive planning, information gathering and groundwork across all facets of the business to get IPO ready. Activities typically include:  

– Financial Record Update – Bring financial statements, accounting policies etc. up to required public company standards. May take 9-12 months.  

– Business & Strategic Plan – Craft or refine multi-year business plans mapping out growth strategies, operating structure, competitive positioning etc.  

– Intellectual Property Audit – Review status of patents, trademarks, copyrights etc. and make any changes to optimize IP protection.

– Bylaw Changes – Modify governance provisions like board structure in articles of incorporation/bylaws to ready for public markets.

– Hire Key Roles – Bring on personnel with public company experience especially in IR, finance and legal/compliance.

3. Declare Intention and File IPO Registration  

A major milestone is the official act of commencing the public offering process by submitting an S-1 registration statement (or other applicable form) to securities regulators. This lengthy document includes:

– Business Overview – Description of products/services, value proposition, history etc.  

– Market Opportunity – Quantitative and qualitative assessment showing growth potential in addressable markets. Use of third party data and reports to support claims.

– Competition – Analysis of the competitive landscape including barriers to entry and success factors.

– Risk Factors – Comprehensive discussion of anything that could go unexpectedly wrong and materially impact financials.  

– Use of Proceeds – Detailed explanation of how much money is sought to be raised and specifically where funds will be deployed. 

– Management Team – Backgrounds and bios of key executives and board members.

– Financial Statements – At least two years of audited financial statements, plus the latest stub period.

– Capitalization Table – Current ownership breakdown showing equity splits between founders, investors etc. 

The S-1 sets stage for meeting with investors by revealing previously nonpublic details on operations and plans.

4. Investor Roadshow

After filing registration papers, the management team goes on a 2-4 week “roadshow” to pitch institutional investors like mutual funds and hedge funds to generate interest before shares start trading. This involves:

– Presentation – A 25-40 page slide deck covering growth opportunities, financial forecasts, competitive differentiation, management bios etc. 

– One-on-One Meetings – Private sessions allowing prospective investors to conduct due diligence by asking questions about the business. 

– Filed vs Verbal Guidance – Pricing details can’t be shared beyond what’s in filed docs, but verbal feedback helps fine tune deal terms.

– Orders and Allocations – Investors give non-binding indications of interest that help determine share pricing and allotments.  

Mastering the company pitch and anticipating tough questions during the roadshow is critical to generating enough demand during the order collection phase.

5. Pricing and Distribution 

Just before trading opens, shares are priced based on roadshow outcomes and allocated to institutional investors. Key steps include: 

– Final Pricing – Usually the evening before trading starts, the underwriter and issuer will land on the IPO offer price after assessing overall demand signals.  

– Share Allocation – Shares are distributed to investors based on several factors like order size, investment strategy, desired type of shareholders etc.  

– Lock-Up Agreements – Insiders sign contracts restricting them from selling shares for 180 days post-IPO to prevent sudden dumps. 

6. Execution and Aftermarket Support

With the order book filled, shares start trading on the chosen stock exchange. But the underwriters’ work continues by trying to deliver an orderly aftermarket for new investors. Efforts include:  

– Greenshoe Option – Underwriters allot ~15% extra shares to themselves, allowing repurchases if trading dips below the IPO price to support the stock.   

– Price Stabilization – Direct share repurchases, disseminating positive research reports and other initiatives aimed at buoying the share price early on.  

– Liquidity Provisioning – Commitment to maintain active bid and ask orders/inventory on both sides of the spread for smooth trading.

While aftermarket activities help, newly public small cap stocks tend to be quite volatile until several quarterly earnings releases help establish credibility.  

Structuring the SME IPO Deal

Beyond navigating the high-level process, SME leadership teams must work closely with their bankers and legal counsel to structure key aspects of the IPO to align with company objectives and investor preferences. Some key structuring considerations include:

Offer Size

The number of primary and secondary shares put up for sale must balance capital needs with potential dilution. Typical SME IPO sizes range from $10 million to $100 million. Offer sizes at the higher end may require a lead underwriter with greater distribution capabilities.

Share Class Structure

Will common shares be offered or will there be a dual-class structure? Classified stock allows insiders to retain voting control. Some investors push back on this.  

Price Range

The preliminary price range marketed during roadshows sets expectations. But the final price only gets locked after assessing demand. Most IPOs price 10-20% below the indicative range high end to leave room for a first day trading pop.

Use of Proceeds

Having a justified plan for deploying IPO capital based on growth requirements rather than cashing out insiders leads to better reception. Proceeds should fund clear strategic imperatives.

Lock-Up Agreements 

Locking up insiders for 6 months gives confidence that they won’t quickly flip shares after the IPO. Underwriters may release parts of lock-ups early if trading conditions permit.  

Greenshoe Provision

Allowing underwriters to over-allot shares enables buybacks to support trading. This trades off with potential dilution if the greenshoe gets exercised.

Institutional vs Retail Allocation

IPOs focused on raising large amounts may allocate up to 70-90% shares to institutions. But carving out at least 10-15% retail allocation helps public relations.  

Exchange Listing  

In the US, Nasdaq and NYSE have different listing requirements in areas like minimum revenue, valuations, shareholder equity etc. Companies should choose the optimal venue well in advance.

一IPO is sometimes an intermediate step before IPO

Staged Listing Approach

Rather than directly pursuing a full IPO on a major stock exchange, some SMEs consider a “staged” path spanning 2-3 years:

Year 1: List on Junior Exchange – Many countries like Canada, Singapore and Australia have public exchanges tailored to emerging, high growth companies with scaled-back compliance rules vs main boards. These include the TSX Venture, ASX Small Ordinaries and SGX Catalist. Their lighter regulations help introduce companies to being publicly traded while still private company-sized.

Year 2: Uplist to Primary Exchange – If companies outgrow the junior exchange listing tiers designed for microcap stocks, they can consider migrating shares to the parent country’s primary exchange. 

Year 3: Cross-Border IPO – After a couple years of operating as a publicly listed firm in the home market, companies can tap into larger foreign investor capital pools by pursuing a cross-border IPO. Some common migration paths include SGX to HKEx or ASX to NYSE/Nasdaq.

Companies need to check if they fully meet listing requirements before uplifting to higher tier exchanges. But the staged approach allows growing into the expanded scrutiny and compliance gradually over multiple phases.

SME IPO Valuations 

Arriving at an appropriate IPO valuation relies on balanced input from the issuer, bankers and institutional investors. Key valuation methodologies include:

1. Comparable Companies Analysis – Publicly traded peer group’s valuation multiples like P/E, EV/Revenue etc. establish benchmark ranges. Adjust up or down from there based on growth rates.
2. Discounted Cash Flow Analysis – Project future cash flows based on financial forecasts, then discount these long-term cash flow streams back to the present to derive a valuation. Rely on WACC and terminal value assumptions.  
3. Precedent IPO Transactions – Recent IPO deal terms for peers that priced offerings can provide an indicator of current market pricing thresholds.
4. Prior Equity Funding Rounds – The post-money valuations investors accepted in the latest private funding rounds before the IPO can inform appropriate IPO valuations.  

Since most SMEs pursue just one major IPO, they have limited prior experience fine-tuning public market valuations. Thus, leaning on bankers adds value. Valuations factoring in upside while avoiding excessive overreach relative to peers strike the right balance in garnering investor interest. 

The Long View Post IPO

SME leaders must look beyond the IPO itself while making this strategic move to fund future growth. Public listing brings both financing opportunities and regulatory obligations over the long run that now become integral to managing the business.

Ongoing Financing Options  

• Seasoned Equity Offerings – After lock-up expirations end, companies can issue primary follow-on offerings to raise additional capital.   
• Secondary Sales – Insiders may sell portions of their retained holdings periodically to generate liquidity.
• Convertible Debt – Issuing convertible bonds offers a hybrid approach between debt and equity financing. 
• Commercial Paper – Large public companies enjoy greater access to short-term corporate debt like commercial paper borrowing at low rates.

Life in the Spotlight

By tapping public markets, companies open themselves up to substantially expanded visibility and scrutiny from shareholders, analysts, financial media and other parties. Management should prepare to handle:

• Quarterly Earnings Calls – Walk through latest operating and financial results on live public phone calls. Calls start promptly at close of trading for the quarter.
• Analyst Coverage – Research analysts at investment banks will actively monitor, model and publish reports on your company’s stock. 
• Financial Press – Business media outlets will report on any notable news events related to your company. PR teams should proactively engage with key reporters.   
• Proxy Fights – Activist investors may acquire stock with aims to force changes in strategy or potentially board seats. Adopting strong corporate governance helps inoculate against proxy battles.
• Class Action Lawsuits – Should growth stall or controversy arise, law firms quickly file shareholder lawsuits. Maintaining prudent D&O insurance helps mitigate legal risks.

The Bottom Line

Pursuing an SME IPO can be a rewarding yet intense process for enterprises looking to graduate beyond reliance on private capital. If considering an IPO, the most crucial preparatory step is assembling an experienced cross-functional team with public markets DNA. This group can then weigh and address key issues such as optimal timing/size, investor targeting, risk factor analysis, financial record hardening and post-IPO planning to chart the best course for a successful offering. With diligent upfront planning and commitment to long-term public company obligations thereafter, an IPO can help propel SMEs to the next level.