An M&A might be good for the bank, but is it good for your company? Going public on the right exchange might be the answer to your funding dilemmas.
5 min read
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Last year, the World Federation of Exchanges published a report claiming that many leaders at small and medium-sized companies are inadequately informed or educated to make decisions about equity market financing. Its findings suggest that company leaders may not have access to information on various key listing aspects, such as corporate governance requirements and ongoing listing costs, that are required to critically assess the benefits of going public.
As a result, business owners often look to intermediaries to guide the decision-making process, which doesn’t always lead to the best advice. For instance, some U.S. investment banks don’t have the necessary licenses to take companies public on Canadian exchanges, so they’ll often advise Canadian companies to exit early through a merger and acquisition transaction — which tends to be more lucrative and often lower-risk for the banks.
It’s no wonder so many advisors are incentivized to advocate for M&A transactions rather than advocate for the growth of the company in a public market. Or that, based on popular opinion, going public is a big liquidity event for existing shareholders rather than an opportunity to raise growth capital.
Related: IPO Vs. M&A: By Chance Or By Choice?
Building a long-term business requires flexibility across all facets of the company, and the financing structure is no exception. The public markets offer a great opportunity for just that — they allow for early investors, as well as the addition of new investors who want to continue to grow with the company. But in order to be successful, entrepreneurs must fully grasp a number of important factors.
1. Understand the evolving market and listing intricacies.
Corporate governance requirements are a good place to start. Regulations change depending on the location of the exchange, and the specific listing requirements (both initial and ongoing) can vary by exchange as well.
New exchanges will also shake up the market. For example, the Nigerian Securities and Exchange Commission is planning new exchanges that cater to small and medium-sized companies deterred by the stringent listing requirements of the Nigerian Stock Exchange, similar to what we’ve achieved in Canada with TSX and TSX Venture Exchange. Countries around the world are establishing similar small market cap exchanges, including Saudi Arabia, Israel and the U.S.
Markets are constantly evolving, so it’s important to know how a chosen exchange platform aligns with a company’s development stage and long-term goals. A company seeking liquidity, for instance, needs very different things from an exchange than one seeking long-term financing.
2. List on an exchange that has the right checks in place for you.
The New York Stock Exchange is typically reserved for the world’s largest companies, as generally companies must have pre-tax earnings of more than $10 million to list. However, there are many other excellent exchanges out there; your choice should focus on your company’s current stage of growth.
Selecting an exchange that operates with the appropriate listing standards in place will give you confidence in the regulation of your business (and others) and provide experience in public market requirements as you grow and mature.
The listing requirements don’t need to be overly complex, but they do need to provide a support system to foster the market’s integrity. For example, on TSX Venture Exchange, we conduct management background checks and review financial statements, business plans and disclosure practices. Our listing requirements are simple enough, but they help ensure that listing companies have well-articulated business plans and sufficient capital to test those business models and operate for a year without raising additional funds.
3. Engage with a broad investment audience to build a legacy.
According to Fundable, fewer than 1 percent of companies end up getting an investment from venture capitalists. Finding alternatives to VC funding is just one of the many reasons going public can be beneficial to companies at an earlier stage in their growth. It also gives a wider pool of investors early access and allows them to feel like they’re a part of something bigger, all while enabling the management team to retain control long-term.
Further, going public can help increase a company’s profile and credibility with prospective customers and employees, effectively becoming a stamp of approval.
To help improve your odds and build credibility in the capital market, be sure to engage with potential investors early on. Be transparent with your business plan so they can follow press releases, trust your execution and generally feel in the know once they have their investment dollars wrapped up in your company.
As you expand your audience, use the tools at your disposal to engage with audience members across multiple channels. Everything from web demos and phone calls to road shows and even videos can help generate buzz around your company.
Each year at TSX Venture Exchange, we create the Venture 50 videos, in which management teams tell their story in three- to seven-minute clips. This allows us to highlight our top listed performers and gives our companies another way to connect with investors.
At the end of the day, you need people to be excited about your business or product. Going public isn’t always easy, but by engaging with a broader audience and building a groundswell of support, companies are able to weather the inevitable storms — including those times individual investors opt to rotate out. Before going the M&A route, explore the potential of an exchange listing and determine what course of action is really best for your business.