Is it time for an IPO ?

The first question you should ask yourself if where you want to go - and more importantly - why?

The simple truth is that going public may not be the right strategy for every company.

The choice of destination will fully depend on the objective you are trying to reach and your reasons for heading out on the journey in the first place. Depending on your company's objectives and maturity, there might be a number of why an IPO could be the right step for your company. For example, IPOs can enable private companies to:

* Access new funding: companies seeking to grow organically or through M&A may consider going public to access new sources of long-term capital that can be reinvested into the business.

* Deliver value to existing investors: by listing your company's equity on the public market, existing stakeholders are able to 'monetize' their investment and create viable exist strategy.

* Build market awareness: many companies pursue an IPO in order to build their reputation and visibility in local and foreign markets, particularly in cases where the company's main focus of operations lies outside of major markets and the developed economies.

*Incentivize employees: corporate stock option programs are a strong vehicle for driving employee engagement and tying compensation to the financial performance of the company.

* Broaden the governance structure: while there are a number of ways to strengthen a company's governance, IPOs provide a strong catalyst and proven framework for revitalizing the governance structure. And while these are some of the most common reasons to set out on an IPO journey, there may be a number of other side benefits that can be attained through the process. For example, companies operating in politically unstable jurisdictions - or ones with opaque regulatory protection - may find that listing on a foreign exchange provides a level of protection for their existing investors. In other cases, an IPO may constitute a step towards securing lucrative contracts that are reserved for pubic companies.

The wisdom of looking before you leap There are, however, a number of important draw-backs to going public that may not always be obvious before starting the journey. Companies considering the IPO process should be aware that their organization may meet a number of significant challenges along the way, such as:

* Time and resource requirements: being a public company takes a lot of hard work, not only to ensure a successful IPO, but also to maintain your listing and uphold your stock price. In particular, most executives find they are challenged to devote the necessary time to successfully manage both the IPO process and simultaneously serve their core business.

* Transparency and reporting: public companies are obliged to report their financial statements and future strategy to investors and analysts, which is not only time consuming, but may provide competitors with valuable insight into proprietary business plans and strategies.

* Regulation and compliance: publicly traded companies face an exponential increase in the level of regulatory scrutiny and compliance that must be met, and - if found non-complaint - they may face stiff penalties or suffer from depressed share prices as a result.

* Cost: private companies will invariably need to invest in their company in order to create the right environment within which to go public. In many cases, significant investments may be required to create and formalize processes to ensure compliance with IFRS and other financial reporting requirements.

With the proper planning and guidance, each of these issues can be mitigated. But for many executives - particularly entrepreneurs - the requirements, rigor and obligations of performing as a public company are often underestimated. The reality is that public companies are very different from private ones, and some executives may quickly find that the effort and risk may not always outweigh the benefits. If not an IPO, then what?

It is entirely possible that an IPO may not be the right path for your company in the near future. There may be a number of viable alternatives that can be explored to achieve similar objectives. These include:

* Accessing bond markets: bond markets provide an avenue for private companies to sell their debt on public markets, but without many of the rigors of regulation that come with an IPO.

* Bank borrowing: companies may also gain new financing through traditional loan and debt vehicles raised through commercial banks. But given the tight credit market that followed the recent economic recession, bank financing may not always be available and can be comparatively expensive for many companies.

* Mergers and acquisitions: an alternative method for monetizing existing investors is to either sell the company or merge with a competitor, effectively 'buying out' the existing shareholders. However, this often results in a loss of control.

* Joint ventures: expansion into new markets can also be accomplished through joint ventures with other companies that can provide access to funding, technology or key markets. Often, joint ventures are founded between equals who then work together to pool their resources and achieve a shared goal.

* Private Equity: securing an investment from a Private Equity firm is a common method for raising funds while simultaneously maintaining the confidentiality of the business.

However, this route does not always provide a clear exit strategy for existing investors and may reduce the overall visibility of the company in the market. The highly leveraged structure typical in a PE deal also bring increased risks. Clearly, the first step for any executive considering an IPO is to define their destination, motivation and approach which, in turn, will form the basis of their corporate strategy going forward.

And if an IPO turns out to be the best solution, executives who have completed this important first step will be better placed to move ahead with a clear understanding of their opportunities, goals and challenges.

Many companies find that the detailed planning necessary from an IPO also brings benefits if plans change and an M&A deal is contemplated. (KPMG International)