10 Key Things to be Considered by SME Promoters before going public via SME IPO

We all know that SMEs can go public via an SME IPO, but the question is why?

Well, promoters may decide to take their company public to raise funds for business expansion, which is mostly the case, or to continue existing business operations.

Whatever the reason is, taking an SME to the primary market is not easy, as it is a lengthy process subject to various legal and regulatory requirements.

If you, as an SME owner, decide to go public, you must first check the requirements for raising capital. Factors such as the current market scenario, market conditions, and investor sentiment should not be ignored.

It's also important to understand the regulatory requirements and prepare for financial and legal readiness. In addition, promoters need to estimate how much will it cost the company to conduct an SME IPO. If you sell shares, your ownership will be diluted among shareholders, so owners should also think about the dilution of control, relationship with shareholders, good corporate governance practices, and internal operational aspects.

Here are the 10 most important factors that must raise your eyebrow before going public.

1. Assess Your Capital Requirements

Raising capital is the most common objective of an IPO. So before you take your SME company public, you should ask yourself a few important questions:

• How much capital do you need to raise through the IPO?
• Why do you need funds, or what is the purpose of the IPO issue? A company can use the funds raised through the IPO towards business expansion, repayment of debt, setting up a new factory, buying new machinery, developing new products, investing in research and development, or other capital expenditures.
• Company valuation: Analyze the current company valuation or the current value of your company.
• Assess how much equity you are willing to give/dilute to investors. Shareholders have a stake in the company and have decision-making power. So before you sell IPO shares, the promoters need to indicate the percentage of ownership they are willing to dilute through the IPO offering.

2. Analyze the Current Market Scenario to time the IPO

Never take the risk of ignoring the market scenario, but why? Launching an IPO in a negative market sentiment, SME IPOs can be listed at a loss even with promising growth prospects, so market timing is an important factor to be looked for while floating an IPO.

• SME owners planning an IPO must analyze the current market scenario. The promoters of the company need to assess whether the prevailing market conditions are favorable for the IPO offer or not. The promoters need to assess the current market sentiment, economic conditions whether stable or not, and industry trends in which the company operates.
• Not only the market sentiment but also the investor sentiment needs to be assessed. Yes, promoters should analyze whether investors are interested in similar companies or industries or not.

3. Examine Regulatory Requirements for the IPO Launch

The decision to go public is subject to extensive regulatory requirements. Non-compliance with the applicable rules and regulations can damage the company's reputation and brand image.

Public companies are strictly regulated by SEBI and the stock exchange and are subject to stringent disclosure requirements.

What should promoters look out for to comply with the regulations? Here is the checklist;

• Prepare and familiarise yourself with all the necessary disclosure and regulatory requirements of the SME Exchange (BSE SME and NSE Emerge), SEBI, and other relevant authorities.
• Prepare audited and restated financial statements following applicable accounting standards and regulations
• Ensure that the regulatory environment and legal structure of your company comply with the laws
• Resolve any pending litigation for regulatory approvals
• Not only does the IPO process require company owners to comply with applicable regulations, but also when SMEs are listed on the stock exchange, they are required to disclose a range of information, e.g. half-year financial results, shareholding pattern reports, etc.

4. Examine your Business Operations and Corporate Governance

Before preparing for the IPO, company founders or promoters must accept that their operations will be in the public eye, which is why maintaining transparency is a must for companies that want to go public.

SME promoters who decide to take an SME public must disclose all business procedures and operations to reassure investors that the company is legitimate and working in the best interests of investors. Transparency therefore builds investor confidence.

Take a look at the key steps promoters should follow to maintain transparency in the company;

• Develop and embed transparency in the corporate culture to prevent unethical practices
• Analyze the business processes and infrastructure and ensure that they meet the requirements of a listed company
• Develop and maintain an effective internal control mechanism
• Transparently disclose all financial information and operational business practices to regulators
• Comply with and disclose all material contracts and agreements to the authorities
• Establish a sound corporate governance structure and ensure strict compliance with the Code of Conduct
• Restructure the Board of Directors in accordance with SEBI regulations

5. Cost of Going Public

Not all eligible SMEs can go public, as the costs involved are a major obstacle.

Although IPO is considered a cost-effective way of raising capital compared to debt, SME owners must not overlook the costs of fundraising through SME IPOs.

Before you go public, promoters need to consider the likely costs of becoming a listed company.

Key expenditures in the SME IPO launch;

• Merchant Banker Fee
• Legal and accounting fee
• Underwriting fee
• Registrar fee
• Marketing, printing, and advertising fee
• Exchange processing fee
• Travelling, documentation, and other fee

Company owners should not only examine the cost of fundraising through IPO launch but also examine the ongoing cost post-listing. Promoters should assess what it will cost to operate as a publicly listed company.

• Annual Listing Fee of SME Exchange
• Compliance costs to meet ongoing reporting requirements i.e., reporting of half-yearly and annual results and other disclosure requirements.
• Cost to maintain a sound relationship with investors
• Maintaining additional internal resources for compliance with regulations

6. Transfer of Ownership and Control

In an IPO, a company sells shares to the public, and ownership is transferred. The shareholders are the owners who can use their voting rights to participate in the company's decisions. So before you go public, you need to be aware of the loss of control or dilution of equity stake to shareholders.

Also, SME promoters must take all necessary measures to maintain a good relationship with shareholders. Here are some ways to do this

• Communicate with your shareholders to keep them informed and updated on key business decisions
• Invite them to board meetings
• Provide financial results updates to shareholders, etc.
• Fulfill the promises you have made to investors to meet their expectations, e.g. dividends, bonuses, and other shareholder perks

7. Twin benefit of Growth and Exit Strategy

The IPO brings advantages for both the issuing company and the investors. The company in need of capital can use the IPO to raise the necessary funds to drive business growth and expansion and increase long-term value. The decision to go public must be aligned with future growth plans and strategic goals. This will allow the company to capitalize on new growth opportunities for long-term success.

Even after the listing, if the company needs more capital, it can issue FPOs (Follow-on Public Offerings) to raise additional funds from the public.

On the other hand, once listed, the company's shares are publicly traded on the stock exchange. The SME stock exchange thus offers owners and investors a credible platform to exit from the company. Potential investors who are convinced of the company’s growth can buy shares and benefit from the increase in value.

8. Want to Build a Strong Brand Image

Does going public improve the brand image? Yes, the decision to go public undoubtedly increases brand value. Let’s understand how:

• Companies that are privately held tend to be less known, whereas listed companies have a high brand recognition. This is because such companies are well recognized in the outside world, i.e. they are more often in the news or media, which increases brand recognition to a great extent.
• Compliance with stringent regulatory procedures and disclosure by listed companies also increases the credibility of the company.
• Listed companies are easily recognizable to potential partners and business associates and can attract new investors. As the companies are known to a larger customer base, they can increase their market share in the industry. The listing itself also contributes to the company’s competitive strength, and companies with solid growth potential can attract potential investors.

Brand Building through SME IPO

9. Benefits of Employee Stock Option

SME owners who decide to take their company public can take advantage of employee stock options to retain talented workers.

Let’s first understand what an employee stock option (ESO) is.

Employee Stock Option, also known as Employee Stock Ownership Plan, is an employee benefit plan that gives them ownership rights in the company in the form of shares. Listed SMEs can offer stock options and other share-related incentives to their employees. When employees are offered such ownership incentives, they feel valued and an integral part of the company, which boosts employee engagement to an amazing extent and encourages them to stay with the company for the long term. This not only helps companies to retain talented workers but also to attract new talent.