LEADING A BUSINESS THROUGH IPO, EXIT AND BEYOND

• Deciding whether to float or not?
• Short, medium, long term – the pros/cons of different scenarios
• How to enhance shareholder / stock value
• What are the pitfalls which can result in a flotation and how to avoid them
• What are the Corporate Governance, risk mitigation and due diligence requirements?
• How do you go about assembling an effective Board of Execs and NEDs?
• What are the key skills of a successful Non-Executive Chairman?
• Examples of leading ailing businesses through turnaround and learnings gained.

DECIDING WHETHER TO FLOAT OR NOT?

Need to be certain you want to move into a public spotlight that comes with being listed

Significant greater rules and regulations as a public company

Undergo internal audit to ascertain whether the business is in a position to do so. A full business review

Assessing in advance issues including:

• Corporate structure
• Board structure
• Board and senior management abilities
• Corporate Governance analyses
• Issues which would prevent Listing
• Internal control reviews
• Tax check ups and requirements

UNDERSTANDING THE REQUIREMENTS OF INSTITUTIONAL INVESTORS

• Solid management team
• Proven concept
• Sizeable market opportunity
• Differentiated proposition
• Rationale for joining the AIM
  • Growth Capital
  • Raise profile
  • Incentive / retain staff through tradable equity

The items above should form an executive summary to the superior strategies for business plan and strategy document, together with a financial summary, to use as a preliminary document to start to assist the Company.

IPO PROCESS – PHASE 1 – STRATEGIC ISSUES

Strategic issues:

• Business Plan and Strategy
• Rationale for an IPO
• Capital Structure and Debt Financing
• Intentions of major shareholders post listing
• Issue size and structure
• Timing
• Advisors
  • Nomad
  • Legal
  • Accountants
  • PR
  • Registrars

Indicative AIM flotation timetable

The Advisors

IPO PROCESS – PHASE 2 – PLANNING

Planning:

• Corporate Structure and domicile
• Financial Track record
• Dividend policy
• Board Structure and Corporate Governance
• Incentivisation Schemes
• Employee Participation
• Project Timetable

DUE DILIGENCE

• Financial Modelling
• Long Form report
• Commercial due diligence
• Legal due diligence
• Prospectus Drafting
• Shareholder Agreement
• Underwriting Agreement
• Lock up undertakings
• Roadshow presentation

We will guide you in the selection of the relevant professionals who can provide relevant services around the above activities

COMMERCIAL AND FINANCIAL DUE DILIGENCE

• Detailed operational, commercial and strategic plan for the business
• Business development opportunities
• Detailed budgets and forecasts

At this preliminary stage this only needs to be provided at a high level and in summary form

LONG FORM REPORT

• Nature and scope of business
• Adequacy of accounting systems and internal controls
• Past record of forecasting of results and working capital requirements
• Appropriateness of accounting policies

SHORT FORM REPORT

• Financial Statements and Cash flow for 3 years
• Accountants to confirm that accounts are fair and reasonable

WORKING CAPITAL REPORT

• Statement is required in prospectus / admission document that company has sufficient working capital for the next 12/15 months
• Detailed review of monthly working capital requirements and compliance with relevant covenants together with sensitivity analysis

Not required at this preliminary stage

SHORT, MEDIUM, LONG TERM THE PROS/CONS OF DIFFERENT SCENARIOS Of AN IPO

Short Term (PROS) 18 Months

• Providing access to Capital for growth – Raise finance for further developments as Company grows
• Placing an objective market value on the Company’s business
• Increasing the Company’s ability to make acquisitions (Available Currency)
• Create a market for Company’s shares and broadening the shareholder base
• Encourage Employee commitment and incentivising their long term motivation e.g. share options
• Creating heightened public profile
• Always under promise and over deliver

Short Term (CONS)

• Dealing with increased disclosure and greater Regulatory obligations
• Additional costs associated with new audit fees, investor relations, NEDs, etc.

Medium Term 3-5 years

• Stable Management team pulling in the same direction
• Stay focused on Plan
• Maintain momentum – with shareholders following IPO
• Be transparent – To obtain the long term support of all shareholders
• Consistently meet the delivery or growth plan
• Do not become obsessed with share price

Change Board / Chair at what point and why?

Long Term 5 year +

Investors looking for:

• A committed and experienced management team
• Commitment to strong corporate governance procedures
• A viable Corporate Culture
• Sustainable Competitive position
• Growing business operating in an expanding market, locally and / or internationally
• Visibility and quality of earnings
• In summary: Quality, Good Governance and Value

HOW TO ENHANCE SHAREHOLDER / STOCK VALUE

• Once transformation into a Public Company is complete, it is just the beginning, and company then needs to meet the ongoing obligations of public markets
• Management needs to execute strategic initiatives and transactions
• Invest in good people and continue to evaluate the performance of the Board and management team
• Under promise and over deliver – Turnover, Profits, etc.
• Engage with investors effectively through a clear communication plan
• Manage Risk and Promoting good Corporate Governance , will add value
• Do not over-value the business. This is less important at IPO time.

WHAT ARE THE PITFALLS WHICH CAN RESULT IN A FAILED FLOTATION AND HOW TO AVOID THEM

• Management – Comply with rules, culture, etc
• Need to be sensible when valuing Company
• Investors will not invest in Companies where the Revenues or Assets are not substantiated
• Need a clear vision with credible management team committed for the long term
• Cannot raise all the funds needed
• Down turn in economy and stock market
• Fraudulent information
• Intellectual Property Rights – issues relating there too

FINANCIAL DUE DILIGENCE

The Business Plan prepared by the Company

• Detailed operational and strategic plan for the business
• Business development
• Detailed Budgets and forecasts

Long form report prepared – by the reporting accountants who records the results of the financial due diligence

• Nature and scope of business trends
• Adequacy of accounting systems
• Forecasting, working capital, accounting policies

Short Form Report

• 3 year Financial statements (Audited)

Working Capital Report – 18 Months

Legal including verification of, Material contracts, Underwriting Agreements

WHAT ARE THE CORPORATE GOVERNANCE, RISK MITIGATION?

RISK MITIGATIONS (who is responsible for reviewing Risk mitigation issues)

• Auditors
• Reporting Accountants
• Lawyers
• NOMAD (Nominated Advisors)

All above would assist in ensuring that the information is correct and ensure due care with risk mitigation

The end result being the admission document which is the responsibility of the NOMAD to the Stock Exchange, ensuring everything is correct and verified.

STRUCTURE AND REQUIREMENTS OF AN EFFECTIVE BOARD

Well functioning Board is led by the Chairman

CORPORATE GOVERNANCE FOR GROWING COMPANIES

WHAT ARE THE OBJECTIVES OF CORPORATE GOVERNANCE?

Corporate Governance is the system of processes, activities, standards and reporting to facilitate and deliver growth in long term shareholder value by reducing risk while maintaining a flexible, efficient and effective management framework within an entrepreneurial environment.

It represents a dynamic relationship between shareholders, the Company and the Directors, influenced by a number of external factors including regulation and social responsibility.

It reduces the risk of uncommercial and inappropriate bad decisions being made.

SUPERIOR STRATEGIES FOR BUSINESS GROWTH: QCA Code

THE PRINCIPLES OF THE QCA CODE

• Establish a strategy and business model which promotes long term value for shareholders
• Seek to understand and meet shareholder needs and expectations
• Take into account why the stakeholder and social responsibilities and their implications for long term success
• Embed effective risk management, considering both opportunities and threats throughout the organisation
• Maintain the board as a well functioning, balanced team led by the chair
• Ensure that between them, the directors have the necessary up-to-date experience, skills and capabilities
• Evaluate board performance based on clear and relevant objectives, seeking continuous improvement
• Promote a corporate cultures that is based on ethical values and behaviours
• Maintain governance structures and processes that are fit for purpose and support good decision making by the board
• Communicate how the company is governed and is performing by maintaining a dialog with shareholders and other relevant stakeholders

Once initial sale terms are agreed your buyer will review commercial aspects of your business – such as contracts, staff and key customers – to ensure the claims you have made about the business are accurate. This process is known as `due diligence`.

Do not start due diligence until you have agreed a price and terms with the buyer. The investigation period is negotiable – but should last at least three weeks, although all sales are different. The process can be speeded up if you and your staff are as co-operative as possible.

Your buyer and their advisers will probably need to spend some time at your business’ premises reviewing original documentation, but try to ensure as much work as possible is carried out off-site. The process must be controlled to guard against it being used as an excuse for renegotiating the deal.

The due diligence process is likely to cover:

• the business’ past and forecast financial performance
• accounts
• valuation of property and other assets
• legal and tax compliance
• any outstanding legal action against the business
• major customer contracts
• intellectual property protection

The final sale agreement

As the due diligence process nears its conclusion you and your advisers should finalise the sale agreement. This will contain the exact details of the sale, much of which should have been outlined in the heads of terms. There will have been compromise on both sides to obtain a final document that is acceptable. But you should maintain a dialogue with all parties to ensure the final agreement is acceptable and contains no hidden surprises about your future liabilities.

Your advisers should ensure you fully understand the terms of the agreement you are signing and the full extent of any indemnities and warranties you have agreed to.

Due Diligence: The last stage in the business-buying process: “The Final Frontier”. This is the time when you will have access to all of the company’s books, records and files. You will have a pre-determined due diligence period in which to investigate the information to ensure that it is true and accurate. The due diligence phase is also the time when many prospective business buyers make the most expensive mistake of their lives!

• Every Business Has Secrets
• Your Investigation Must Be Flawless!
• The only way you can determine if it’s right and what the future looks like is by conducting such an exhaustive due diligence investigation that by the time you’re done you’ll know more about the business than the current owner does.
• There is no room for mistakes! You must conduct a due diligence investigation that is so complete that you leave no stone unturned.

About the author: Colin Thompson is a former successful Managing Director of Transactional/Document Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor – RFU Leadership Academy, Mentor – Coventry University, Mentor – The Chartered Institute of Personnel and Development, author/writer Business Advice Section for IPEX, Graphic Display World, News USA, Graphic Start, many others globally, helping companies raise their `bottom-line` and `increase cash flow`.

Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CDROM/Software/PDF and over 2000 articles and 35 books published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.

A business turnaround success history

Revitalised the company , successful Due Diligence, acquired a start-up and established a Joint Venture with a fortune 500 all within 12 months followed from fast growth , global expansion and acquired within 3 years.
Company: Medium Size , 5 years in B to B business , offices in 7 countries (Hong Kong ( Headquarters) , USA , 4 EU countries , Japan ) , selling in approx. 15 countries through partners and company present across the whole value chain from Product/systems planning, design, manufacturing (outsourced) to marketing and sales with partners.
Industry: Renewables – Lighting Solutions
Job: Hired as Global Managing Director to Turnaround the company with 2 years contract and the founder kept the CEO title with focus on Business Development.
How Hired: I had met the founder and CEO in a conference 3 years ago and after 2 failed turnaround attempts he approached me and asked me if I could help.

Company status when i joined:

• Various shareholders were managing the different subsidiaries and there was a very fragmented strategy as well as no agreement on fundamental common policies. So No 1 company
• People competencies and skills not up to the level for a fast growth and global company ambition
• Lack of adequate processes for a full value chain and multinational footprint.
• Product/system Quality issues
• Lack of Product Strategy, Product management, Innovation processes and outsource processes
• Slow design process
• Slow manufacturing and supply partners
• With a few exceptions low quality sales partners
• Loosing money every month
• Good Brand name in a few countries and won a few key projects. Something to build upon.
• Execution of projects: Not mature with delays and quality issues
• Relatively ok from cashflow point of view. One problem less among so many.

1. Turnaround Phase I

After 1 month talking to all key people and attempting to understand the Business starting from Customers and Sales ( B2B was slow and new to me as I came from a fast and global Consumer Electronics background with many restructurings and turnarounds ) I decided to focus first on the whole value chain excluding Marketing and Sales . Before the Marketing and Sales area could be addressed the Shareholders Structure had to be simplified/changed as these minority shareholders were controlling marketing and sales subsidiaries.

After 30 days it was disclosed to me that the founders had the ambition for a Joint Venture with a big global Fortune 500 company and the serious talks could even start within 2 months with due diligence within 5-6 months . I said wow, let’s make it happen and sharpened the focus.

As all companies are succeeding or failing due to People I decided as first step to focus on People changes starting from the 2nd month. After I decided with which functions I needed to start first I hired a few key and experienced professionals which I knew personally from my previous career and together with the very few existing competent people started redesigning the processes and planning replacements. Together with the experienced professionals we made a plan to change 60 % of the people (within 6-9 months) in the Headquarters (Hong Kong) without yet touching the marketing and sales subsidiaries worldwide.

It was clear that this was a risky process but we did not have any other option with what was coming to us. With the better people we brought on board many of the existing employees decided to leave themselves making the life partly easier.

Evaluated all short term expenses that could be reduced and took the necessary actions. Within 60 days I met all subsidiary shareholders and all key employees outside of HK. It was clear to me that with the current shareholders it was impossible to create a serious global company and I made it clear to the major shareholders in HK that this needs to be addressed within the current year otherwise this 3rd turnaround attempt is planned to be a failure . It was agreed to happen at the right time within the coming 6 months cause such process takes time.

After 90 days the first negotiations started with the fortune 500 company and within a few months we reached a basic agreement of preliminary terms for a Joint Venture to be followed within months from a due diligence before we go to the negotiation details including the legal lengthy process.

Preparing for the due diligence process

8 months later and preparing for the due diligence process we had replaced 60 % of the people to be replaced , redesigned all processes and started working to buy out the minority shareholders ( 6 legal entities around the world ). When this process had been finalised we started to replace and add a few new marketing and sales employees.

9 months later a successful due diligence process took place with a delegation with as many people as all of our HQ employees. We have been complimented about a few processes that have been considered world class and many good people!.

At the same time and in order to increase the value of the company before final negotiation started we acquired a start-up partner, a company crucial for us to create competitive solutions. This has been discussed a few months earlier and executed within a few months.

As all above was going on we had to improve our product quality, make our offerings more flexible , increase speed of design and execution, address delivery reliability and finally sales growth and profitability improvement .To achieve that beyond focus on internal process improvements we decided to improve the quality of our supply and demand partners . 2-3 new and more competent manufacturing and component suppliers have been chosen , we started evaluating a few new downstream solution sales partners with better capabilities as well as we pursued partnership with 1-2 partners we could create new Innovative solutions together.

Joint Venture negotiations

The last 3 months of the first year on the job have been devoted on execution of all improvements, introduction of a new company operating model and Joint Venture negotiations which were very lengthy with great leadership from the CEO but at the end we signed the JV agreement 12 months after I came on board. Moreover we started the preparation to execute the new JV Business Plan.

What an unexpected first year with so much work , much broader focus than originally requested , many successes AND the key message that any turnaround focus can be different than for what you have been hired for !

2. Turnaround Phase II

After the JV agreement was signed , our main focus was to deliver the JV business plan which had as main focus min 50 % sales growth per year for 3 years . Started by establishing a new Mission , Vision and Operating strategy for the new JV which we deployed worldwide

With more competent & experienced people , better processes , new customer creation and interaction process , better products and systems in the pipeline, better suppliers and better downstream partners we were optimistic to achieve our growth .

To find out more about our customers and what to improve we started a detailed NPS (net promoter score) process including many qualitative questions.

To strengthen our brand in a competitive way we decided to devote more attention to marketing with focus on website, superb marketing content & materials, PR, partner events and digital social networking to create a community!

The main challenges we had to eliminate and/or solve were:

1. Avoid to be slowed down being in JV with a big company. We negotiated in advance as much autonomy as possible.

2. Life cycle of the most of our projects/solutions were average 2 years and we needed to grow sales with above 50 % within 1 year. We managed to achieve it with a list of strategies and tactics :

2.1 Attempted to leverage the JV partner for short term sales : It did not work as we had completely different business model than the partner who did not have access to our market segment
2.2 Extended our business model with a different distribution strategy to enable shorter term sales : that worked only a bit
2.3 With the newly introduced design processes + new more flexible systems + new supply partners we could speed up our systems design and delivery by 6 months as well as offer a lot of flexibility and satisfy many more customer requirements : Consequently we focused to find and win faster projects ( 1 year lifecycle) and this strategy worked partly .
2.4 With the better people that came on board as well as more flexible systems and faster deliveries we started to win projects from competitors as we could deliver faster and better systems & solutions!
2.5 Some of the better newly acquired sales partners helped also to increase sales.

3. As we became more competitive (faster, better quality, more flexible, better partners that build a better ecosystem,…) we set the foundation for structural growth and we reached agreement (Lead from the CEO) with the JV board to invest in more sales resources so we started hiring people in 10-12 additional attractive locations worldwide . People were located in existing premises of the JV partner but kept autonomy reporting to the JV. We were hoping in more future synergies as well but it did not happen as much as we expected because of our different business model and market segments.

The first 2 years after the JV establishment we managed to achieve more than 50 % growth in sales per year and the 3rd year went also well when the JV partner decided to fully acquire the remaining stake of the JV shareholders and make it a 100 % subsidiary. I will stop the story here without explaining what happened afterwards but I will focus on the key lessons learned.

3. What we learned as this was a team effort:

Assembling a core team with the best people available for the task is number 1 priority.

Such a drastic, complex and fast turnaround can only happen with a good Team of top professionals having the right experiences preferably from a different industry , are determined to succeed , are able to think out of the box and are lead from an inspiring and disciplined leader.

To achieve breakthrough a focus on only 1 key business attribute is not enough. You need change of multiple business attributes. In this case we focused on:

FLEXIBILITY AND SPEED AND BETTER PARTNERS AND BETTER PEOPLE AND new customer interaction process AND…

Our 10 tips to achieve a successful business turnaround

• The Turnaround Leader + Team needs to be determined to follow the plan even if it is needed to disturb individual shareholder interests
• JV Partners with different business models and market segments can rarely add value to each other on short to medium term
• A JV needs autonomy to deliver.
• To seriously Innovate cannot be done within an established company which protects the established core business model without full autonomy!
• Software and systems/solution thinking becomes more and more important in our networked world.
• Learning by establishing fast feedback loops from market to the company is vital for success
• Leadership to inspire and focus people behind a bigger vision/purpose than themselves is key for success
• Embracing more and more digital marketing , crowdsourcing and all the new exponential technologies that go across many industries becomes vital for success
• EXECUTION. We delivered what we planned with many challenges but we did and that is what is counts!
• Finally we inspired and nurtured many better managers and employees that started with low level of exposure and learned so much with such a wealth of experiences within 3-4 years time period!

About the author: Mike Mastroyiannis is a highly experienced CEO of Business Units in Global Multinationals as well as CEO and/or Co Founder of technology start ups. He lived and worked in many countries and understands East and West. He created innovative scalable global systems and businesses (15 million to 2 billion USD sales, 100 to 5000 people) as well as reinvented, simplified, automated and grew effectively. He handled many fast turnarounds (6 – 12 months turnarounds) for big businesses as well as Start Ups. View Mike’s short bio