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For family businesses, one of the main attractions of an IPO is to aid in succession planning through the enforcement of certain corporate disciplines that come with being a regulated entity. However, issues ranging from lack of family readiness or worries over loss of company control can make the transition highly complex. However, there are several strategies that family-owned businesses can implement to mitigate these challenges including:
“Most business families are now conscious of the need to introduce a level of governance separate from the family business,” says Walid S. Chiniara, Deloitte Private leader, Deloitte Middle East. Family governance “helps put the house in order.” It defines the relationship among family members, and their relationship with their financial wealth.
Family governance mitigates the risk of family conflicts that negatively impact the performance of the business. Establishing this governance in advance helps minimize any disruption during the IPO process.
During the IPO readiness process and equity story formation, a family group might decide to exit some of its non-core businesses, whether for operational or tax structuring purposes. A company can exit some of these businesses via a separate IPO, giving the family business owners and management firsthand experience of the IPO challenges (increased demands, loss of control and increased communication) without exposing the overall family-owned business.
According to Tharawat magazine, “a good strategy to minimize some of the negative aspects of going public can be to take only part of the business public, keeping the rest private. This is easier where there are a number of businesses, but even where there is only one business, there may be appropriate splits–for instance, the product/service side of the business could be listed, while the real-estate side of it remains private.”
Private placement then IPO
A common approach for an IPO involves a two-step process before undertaking the actual IPO, a minority stake of the business may be sold to another interested financial investor who will partner during the transitional period to get the business ready for the IPO. Having these partnerships potentially with a private equity firm or other family-owned businesses that have prior experience in taking businesses public can be of great value for a first-time IPO candidate.
Additionally, this will expose the family business to some of the challenges of the IPO including the increased scrutiny and sharing of decision-making with a partner who will be more understanding of the sensitivities of the family business.This can be implemented as a dual-track, a parallel readiness strategy between IPO and private placement, which gives the family business the opportunity to change between the two options at a very late stage in the process.
“IPO readiness not only helps prepare the business for a streamlined IPO process, it also significantly enhances the valuation. It is important to undertake an IPO readiness well in advance of the proposed IPO as it can take up to 24 months for the business to achieve readiness,” says Adnan Fazli. “The main areas in our experience that impact the timeline are articulating an equity story/strategy, corporate and organizational structure, appropriate track record to support the equity story, financial reporting environment in line with other listed peers, ability to accurately forecast, and the issuer’s internal resources to ensure they are fit for the demands of the IPO process and the post-IPO environment.”
IPO represents the pinnacle of any family business’ long-lived heritage. Recognizing the challenges faced by both family owners and managers and addressing them upfront, will ensure that the company is well prepared for this transformational change when the opportunity is right and will enhance value. Additionally, undertaking the right strategies will reduce the risk of the impact of adverse challenges which are inherent to any family business seeking a public listing.