What is an Initial Public Offering (IPO)?

IPOs are on the rise, with 8 new companies gaining IPO status at the London Stock Exchange in the first half of 2024, bringing in a total of £513.8M. But what is an IPO, what are the pros and cons, and is IPO status a good goal for your business?

What is an IPO?

When you create a limited company in the UK, you assign shares to shareholders and company directors. For many small businesses, those shares only really amount to one share for the founder, or perhaps two or three, for co-founders. 

As your business starts to grow, you may find yourself assigning further shares as you gain external investment or need to incentivise key employees. At this stage, your company is a private company, with several shareholders, who each may get a say in how the business is run. 

With an IPO, you offer your shares up, making them available to the public for purchase. It’s the first instance in which a private company goes public. This can entail several things, including that the price of your shares can go up or down in alignment with public sentiment, you can begin using your stock as currency to purchase other businesses, and you may see increased brand attention. 

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Pros of an IPO for businesses 

There are several reasons businesses decide to go public, here are some of the pros of IPOs.

Gain additional capital 

Getting access to further investment is the main reason most businesses go public. When going public, companies get funding by selling shares and working closely with an investment bank, as the funds raised from selling the shares go to the company and can be used to boost working capital, fund marketing initiatives, or expand into new geographies. 

Boost brand awareness

Another key reason businesses choose to go public is to gain increased brand awareness. As a business on the stock market, with public shares, businesses who have gone through an IPO gain access to a much wider audience. It is very common for the IPO process itself to generate interest from the media, with press releases, features, and interviews allowing the company to share its story and gain increased exposure. 

Cashing out

If you’re researching IPOs, you’ve likely come across the phrase ‘cashing out’. This is another core reason some business leaders choose to go public. Essentially, as you grow a business, it’s possible you may reach a point where the value of the business is substantial, but that value may not be liquid – just because your business is worth £1M, doesn’t mean you have £1M in the bank. 

To gain liquid access to the cash tied up in your business as an early investor, shareholder, or company owner, you only have a few options, most of which include selling the business, or a portion of the business. Selling can get complicated when one company owner wants to sell and move on, but the others do not, nor do they want to cede control to new investors. IPOs provide the ability for stock holders to cash out, meaning sell on some or all of their stock. 

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Some IPO drawbacks to be aware of

There are also some possible drawbacks and risks to consider. We’ve listed a few of these below.  

A costly process 

IPOs can be expensive. From legal fees, underwriting fees, to the cost of gaining regulatory compliance, your IPO could end up costing you anywhere between 3-10% of the total funds raised. 

Complexity and time 

Going public is a complicated, time-consuming process. This can get in the way of essential tasks involved in managing and maintaining the business. Even the excitement of going public, alone, can become a distraction for team members. 

Control and privacy 

What was once private will likely now become public information. You will have less control over both your privacy as a business and your internal decisions and processes. 

Regulatory requirements 

You will be bound by certain new regulatory requirements private companies do not need to adhere to. This increased regulatory control applies beyond the IPO process itself, spanning across your reporting, governance, and transparency activities. 

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Should I aim for IPO status?

IPO status can be a lofty, exciting goal to aim for. Whether you should or shouldn't depends, of course, on your unique needs and circumstances. But here are some questions to ask yourself when setting goals: 

• Am I okay with increased scrutiny and attention on my business?

• Am I ready for a long, time-consuming process?

• Do I want to ‘cash out?’

• What are my long-term financial goals?

• Am I happy to share ownership of my business with the public?

• Am I okay with taking on the risk of a failed IPO?

• Do I want to gain access to a large injection of capital to fund a specific growth initiative?

Find business finance with Funding Options by Tide

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Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.