Choosing the right time and place to go public is an important question for SMEs. “As soon as possible” is not the perfect answer. It is the most common mistake to go public as soon as possible, and the cost is very high for business owners.
One of the biggest benefits of an IPO (Initial Public Offering) is that enterprises get the cheapest and most effective financing means to expand the scale. After IPO, generally speaking, the stock price of enterprises will trade at a price-earnings ratio higher than 15 times. However, before an IPO, private investors generally will not buy enterprise stocks at a price higher than 8 to 10 times.
Since Corporate valuation (the valuation of an enterprise determines the amount of financing) is a multiple of profit, it is easy to understand that when an enterprise is listed, the higher the profit, the better.
Let’s take an example:
Assuming that the profit of the year before the IPO is 75 million and the price-earnings ratio at the time of IPO is 15 times, the market value of the enterprise can reach more than 1.1 billion RMB, and the capital of 281.25 million can be raised by selling 25% equity.
If the IPO is delayed by private financing 50 million RMB, when the profit reaches 120 million RMB one year later, the market value of the enterprise can reach 1.8 billion RMB. And the same 25% of equity can be sold to obtain 450 million RMB, which is 60% higher than that without private financing.
The more financing is obtained through IPO, the higher profit growth space will be obtained for enterprises, which is the most important indicator of the performance of enterprises after IPO. By delaying IPO, the scale and profit of enterprises will be improved at the same time, enterprises will get more financing, and generate greater benefits in the future.
Private equity financing improves the valuation and financing amount of IPO
An enterprise has only one chance to go public. Therefore, it is very important to choose the time to take action. If an enterprise goes public too early, it will not get enough funds to support its future development.
For the best time to go public, the industry has already done a lot of research and analysis. It is widely accepted that the best time for SMEs to go public is when the enterprises enter the mature period, that is, when the growth rate begins to slow down, rather than when the high-speed growth.
The purpose of a round of private equity financing before IPO is to help business owners get the capital they need to rapidly develop the business, optimize strategies, expand the scale and increase profits, make full preparations for future IPO, and wait for the best opportunity to enter the market with sufficient capital.
With this strategy, the company will sell its shares at a higher price upon listing and more capital can be raised for subsequent development while selling the same share. With the help of an excellent private equity fund, the share price of an enterprise in IPO is much higher compared to no private financing. This is a win-win situation for both the enterprise and the private equity fund.
The most well-known IPO cases of Chinese enterprises are Baidu, Alibaba, Belle, SUNTECH and focus media. They are all successful cases after private equity financing.
Total Market Value of Capital
When listing, there is another important factor to consider – the total market value of capital. The larger the total market value of capital, the larger the trading volume, the more circulating the stock, and the smaller the stock price volatility. This is very important for the performance of the stock price after listing.
There is no general rule that can be applied to determine how big the total market value of capital is to be listed. Generally speaking, to be listed successfully in the United States, the total market value of capital needs to reach 250 million USD.
This usually requires that the profit of the year before the listing of the enterprises should be between 12 million and 1.5 billion. However, EUECM also allows companies with smaller total market value to go public. The Europe Emerging Companies Market mainly focusing on the stock market of SMEs, and upgrades to NASDAQ and other major stock markets of NYSE after the initial listing with a smaller total market value of capital.
After a company goes public, it usually has a lockup period for its insiders. During this period, neither the owner nor his family can sell shares. Usually, the lockup period is six months or even longer.
For business owners, how to ensure that the stock price is still good at the end of the lockup period is a problem that needs to be seriously considered.
The smaller the total market value of a company’s capital is, the greater the possibility of the owner’s share reduction in the future. Therefore, the company should try to increase its profits as much as possible. The higher the company’s profits are, the greater the market value of the listing is, the higher the stock price is, and the more the financing amount is, to ensure that the company has enough capital to keep increasing its profits. In this way, at the end of the lockup period, the company’s profits can support the stock price.
There are many reasons for an IPO. But the most important one is often ignored by the public. The owners of an enterprise increase their personal wealth by selling their shares. Usually, most of the personal wealth of the owners of an enterprise is within the enterprise, not in the bank. An important advantage of IPOs is that the wealth of the owners of an enterprise should not be too concentrated on themselves. For example, business owners can sell a small part of shares, put the cash they get in the bank or buy real estate so that business owners can not only still own most of the shares of the company but also have the cash to pay for other personal purposes.
EUECM IPO refers to the behavior that an enterprise that meets the listing conditions of the EUECM market applies to display its enterprise information to investors on its website and provide information display services. The main purpose is to fully display the competitive advantages and investment highlights of the enterprise through the platform of EUECM and explore investment and financing opportunities.
EUECM provides a fast and low-cost IPO process. Besides, EUECM attracts international investors to provide private equity financing services for those fast-growing and innovative Chinese SMEs. We make great efforts to provide services with excellent quality and services suitable for customers’ unique needs. In no case will we violate the principles of integrity, honesty, and business ethics.
Our intention in writing this article is to help SMEs in China to make correct decisions on the two key issues of when and where to go public.