By going public on the capital markets, start-ups can tap into attractive financing channels. But an IPO requires a lot of preparation. An overview of the necessary steps.
If the story of a start-up follows a script, then the IPO is the grand finale, the moment when all the efforts pay off and all the storylines resolve themselves in a happy ending. Those who believed in the company - founders and investors alike - are rewarded and the company sets course for a golden future.
But going public is not quite so easy to implement. Companies that want to be listed in Germany have to meet a whole host of requirements and take a number of factors into account. An overview of the most important points.
Why go public?
There are a number of reasons why entrepreneurs should aim for an IPO. The most important, as is often the case, is money. Those listed on the stock market can access capital more easily and cheaply than entrepreneurs who rely on lenders. Stocks, unlike loans, are equity, so the stock buyer is not a creditor, but a co-owner. In addition, a stock market listing can have a positive impact on the awareness and image of a company. For example, if a company is listed on the DAX-30, it is practically part of the German business aristocracy.
The legal requirements
However, in order to get there at some point, start-ups have to fulfil a whole series of legal requirements. This starts with the right type of company. In Germany, only companies that are either Aktiengesellschaft (AG), Kommanditgesellschaft auf Aktien (KGaA) or Europäische Aktiengesellschaft (Societas Europaea (SE)) are admitted to stock exchange trading.
The next steps then also depend on which stock exchange segment the company is aiming for. In Germany there are three: the Prime Standard, the General Standard and the Open Market. The Prime Standard has the toughest requirements, followed by the General Standard. It is also the segment that is attractive to most investors, including international investors.
Regardless of the standard, however, every company that wants to go public must submit an issue prospectus. The exact form this must take is laid down in the relevant EU regulations. Basically, it should contain everything an investor needs to evaluate the share. Even after the IPO, companies have publication obligations. The most important is certainly the annual report, which must be publicly accessible. In the Prime Standard, both prospectuses and reports must comply with the International Financial Reporting Standards (IFRS). All events that could influence the share price must also be announced promptly, via so-called ad hoc announcements.
Companies wishing to be listed in the Prime Standard must also have submitted annual reports for at least three years, have a market value of at least 1.25 million euros, issue at least 10,000 shares and have at least 25 percent of their company shares in free float.
The economic conditions
The economic conditions are much more flexible. Here, the company does not have to reach a fixed value in order to enter the capital market. But of course, not every company is equally attractive to investors, so going public may not be worthwhile at all.
It is difficult to make general statements about how a company should be positioned economically, but some points can be made: Key figures such as profit, sales development and growth are not decisive in themselves, but they do play a major role in the context of the industry. If a company is at the top in these areas compared to its competitors, it is attractive to stock market investors. However, the future outlook is particularly important to investors, who are, after all, betting that the share price will rise in the future when they buy a share. Accordingly, a company should be able to explain how it intends to grow in the long term. For example, this could involve planned internationalization, acquisitions or new products.
The organizational requirements
The structural set-up of the company should also meet a number of requirements. Similar to the economic factors, these are not necessarily mandatory, but are expected by stock exchange participants. For example, companies with stock exchange ambitions should have effective controlling systems, in-house risk management and good corporate governance. The accounting and reporting systems should also be set up professionally.
It should also be clear who bears what responsibility in the company and what the ownership structure is. If possible, the management should not be staffed with beginners, and the managers should preferably have known their respective areas for a number of years.
An IPO is very time-consuming, on average the entire preparation takes twelve to 18 months. Since the management also has to run a company, it is advisable to call in external experts. The most important of these are the banks that accompany the IPO. Especially in the case of larger IPOs, there are often several of them. Their task is to analyse the company and approach potential buyers. Then they help to set the issue price. Then they collect subscription requests from investors in order to allocate the shares at the end.
In addition to banks, a company can also call in auditors to review balance sheets, lawyers to identify legal pitfalls, and PR firms to drum up publicity for the IPO.
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