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How to Decide Whether to Sell to Private Equity Investors or Pursue an IPO

Deciding the best way to raise capital for your business in today’s volatile market is no small task.

If you’re weighing whether an initial public offering (IPO) is your best option, despite the slowest IPO market in years, or if the better choice is selling to private equity investors, then it’s worth your while to understand these trends and how current conditions might impact your decision.

Current market trends

There were only 94 IPOs as of October 2016, compared to 170 in 2015. Several factors depressed the IPO market during the past year, including the availability of inexpensive capital and increases in private funding sources.

Markets have also been volatile while institutional investors have lacked enthusiasm for supporting IPOs. Macro issues such as geo-political uncertainty and shifting perspectives on globalization have likely discouraged larger companies from entering the IPO market. As a result, the largest potential IPO candidates (Uber and Airbnb) have so far steered clear of going public.

As for the middle market, the last few years saw transactions with high valuations and high multiples. Many business owners have been looking to cash out or to grow their companies from a strong financial baseline before rates increase or market conditions change.

Accepting strategic private equity allows owners to maintain more executive control and continue the strategies and operations that have made their companies successful thus far. Other key advantages of remaining privately-held are limiting the risks related to hyper-competition in capital markets and avoiding the short term financial performance demands that challenge public companies.

IPO markets can generate the working capital and dividends that companies are seeking to fuel growth and satisfy investors, but at what cost? Without the assistance of an outside advisor, many middle-market companies struggle to meet the intense reporting, governance and controls that becoming a public company require. There are several cautionary tales from recent IPOs (e.g., Box, GoPro, FitBit) that lend credence to a sale or alternative investment as a more viable strategy for some companies. In October 2016, nearly half of the companies that went public saw a decline on day one. ZTO Express, the largest IPO of 2016 to date, saw its stock decline 15 percent on day one.

Pursuing an IPO

Perhaps your situation bucks some of these trends and encourages you to go public. You may be able to model the IPO success of an organization like BlackLine, the creator and premier provider of enhanced financial controls and automation (EFCA) software to streamline financial close operations.

In order to drive such IPO success, you owe it to your organization to define your long-term strategy while being specific about your reasons for raising capital. You should consult with outside advisors who can provide the independent perspectives and industry insights that you may not have been exposed to in the natural course of your privately-held business.

While investment bankers and attorneys have always been a key piece of the IPO ecosystem, financial and operational advisors are increasingly viewed as key ingredients of the IPO mix. Their insights are important to developing and executing strategic goals for any company.

Pursuing both

A dual-track strategy — assessing and pursuing private equity and IPO options simultaneously and following through on one — could be ideal if you lead a middle-market company with the requisite professional talent and appetite for external advisors.

In either case, your management team will be required to spend considerable time preparing for the future. You will probably need to both add resources and engage external advisors in order to meet the demands of a dual-track pursuit. Even before any initial filing is made, your finance and accounting operations are likely to need upgrading as you learn about the complexity of SEC and legal requirements. A readiness assessment led by expert advisors can prepare you to make the best move when the timing is right.

There are advantages and disadvantages to either pursuing an IPO or selling to private equity, so leveraging a trusted third party can be useful when weighing those options carefully.