Five Ways To Choose Between An IPO And A Trade Sale

The U.K. has gone mad for IPOs, part of a global phenomenon that has seen new issue numbers soar around the world this year after a depressed 2020. In the U.K., EY says companies completing initial public offers raised more funds in the first three months of the year than in any other opening quarter since 2007. Globally, IPOs embarked on a similar trajectory.

However, just because the market is open to new issues does not mean an IPO is the best exit strategy if you’re looking to take cash out of your business. With M&A volumes also soaring during the first few months of the year, now is also an excellent time to be thinking about selling to a trade buyer.

Which route—an IPO or a sale—is the better option? In practice, there is no right answer to this question; it will depend on the individual characteristics of your business and, potentially even more importantly, why you want to sell. But if both are an option—an IPO, even on a junior exchange such as London’s Alternative Investment Market, requires your business to of be a certain scale and maturity—here are five questions to help you decide.

• Do you want to remain in control of the business? If so, an IPO is likely to offer a better route. With a trade sale, you are usually handing the business over to the buyer; you may be able to negotiate some sort of continuing role, but you will certainly be giving up control. In an IPO, by contrast, you’re selling the business to a broad constituency of investors; part of the pitch is your success as a management team and your ability to deliver more success in the future as you continue to run the company.
• Are you seeking to realize the maximum possible proceeds? If so, a trade sale will probably generate a larger cheque. In part, this is because trade buyers will value your company on the basis of its likely future revenues, while IPO investors tend to price companies more conservatively. But also, the IPO process is more expensive, reducing what’s left for the seller once all costs are met.
• Are you comfortable with regulatory oversight and other types of scrutiny? If not, an IPO may be a bad option. The IPO process involves a significant amount of regulatory work, including requirements for a broad range of exposures, and you may also face scrutiny from groups such as the press. You’ll also be subject to much more significant regulatory requirements on an ongoing basis as you run the company in its public form following the sale.
• Do you have a new venture in mind that will require finance? If so, you may need greater certainty about how much your exit from your current business will raise—and to require a clean break. A trade sale, in contrast to an IPO, offers both these advantages.
• Are you comfortable with risk? An IPO is always a speculative exercise to some extent—you must persuade enough investors to buy shares in the business at a price you find acceptable, and accept the ongoing risks of running the business once the IPO is complete. An M&A transaction, by contrast, offers greater visibility and a clean break. You know what the proceeds will be in advance, and you’re walking away from the business.