Can our company go public?
Hi all,
I'm an advisor to a friend's business, and he was wondering when it would usually make sense to consider accessing the public markets / equity sale / growth equity and how that process might look like. So the company is currently doing a stable $35-40MM in EBITDA in the consumer industry, net income in similar ballpark, revenues around $150-175MM. Very little to no debt, high assets (they own the office buildings and physical offline locations with loans paid off he estimated about ~$75MM in office buildings alone) currently his family owns 100% of the equity but would like to pursue aggressive M&A to consolidate some other businesses / competitors at a discount. The industry is quite broad and has a sizeable TAM with good margins. Any input would be appreciated, thanks!
This is what you pay an investment bank to figure out, if he makes 40 mm ebitda, 10x multiple (i don't know comps and etc so I'm just saying that for simplicity) thats a 400mm TEV company.
She's a bit tiny to be listed, so growth equity would probably be better, but note that equity dilution is real. Like. Yeesh.
But a standard process, also for any interns watching from the beyond is the following:
1. Make a list of banks, and give them requests for proposals. This is free on your behalf until you and them sign an engagement.
2. Banks pitch, analysts are sad because now they have a bake off for your door hinge manufacturer
3. You choose the bank you like the best, take note for things like confidentiality, legal agreements, and previous transactions in the space. While Goldman sounds like a good option, it might not be the best option in the LMM. (Assuming you aren't going to sell the entire business and >50% to keep ownership
~Time to figure out what type of deal you want: Private Placement, or Public Underwriting~
4. You draft engagement letters (or they do), and go back and forth with legal counsel until you can agree. Then you start the process!
~Investment Banking Start~
5. You will get showered with requests from the bank, so be prepared for a lot of conversations with a lot of dry old white men. PDF everything from tax shit, to internal accounting files, to employee contracts / union conversations, and any material emails. You will also have to discuss ongoing business strategy, current expenses surrounding Capital Expenditures, Debt Covenants, and deep conversations about each division of the firm, from IT, to HR, to the Revenue Generation teams and Sales. Also All of your models. Note, banks may change numbers that you have to more realistic assumptions due to overall market trends. You will also have to file a S-1 if you're going public. The firm will value the company accordingly, and create a CIM and make the first round data room.
6. Once the bank have enough things, it will start to leverage its connections to create a buyer universe. If you want to be private about it, there can be specialized buyer negotiations, otherwise you can make an auction. There are pros and cons to each.
7. Banks will start reaching out to buyers. In a Private Placement transactions you will most likely be looking at a growth equity investor or a LMM minority investment shop. You will probably only be working with one shop in particular, so its important to find one that fits the culture and vibes, with a clear vision for the future. (NOTE: Now is a good time to mention, it may be worthwhile to determine if you'd like to structure the deal that the founder has first dibs in any sale the PE fund has of the company.)
7.5 Underwriting: Firms will still reach out to funds, but IPO shares can go to hedgefunds, mutual funds, pension funds, etc. Its a different buyer strategy, and your friend will have to reconsider a lot of his expense structure and reduction of margins (kill the private jets, for example), as public market investors care a lot more about the quantitative and less about the story because the value of their investments fluctuate much more.
8. You'll either distribute shares to the bank or the investors directly depending on U/W or Priv. Placement. And bam! You're done.
This is really helpful, thanks. On point 3, obviously a Goldman wouldn't be the best advisor but what firms are we talking? Let a MM IB would take on a deal of this size? Also what's a solid size to be considering listing? Like closer to 100MM Ebitda assuming 10x multiple?
Note: I'm in RX, we don't IPO too much i'll be honest.
But A. Yes, a MM IB firm will take on a deal of that size, but it would be at the lower end of the spectrum. (Maybe) Wells / Jefferies / Blair (thinking of UMM's with Cap Markets Capabilities), but normally they market to much bigger firms.
You would be looking at Baird, Stifel, and others that would take on ~100-200mm deals (unsure about the dilution the family is willing to take). Also again, private placements vs IPO is a very serious question and will change what banks you will want. Avoid boutiques unless you're 100% sure you want to private placement, and even then it will limit the buyer universe.
There is no "solid" size to consider listing, but there are specific requirements for each exchange and they're different (Nasdaq vs NYSE, etc). But a rule of thumb is to look at public comps and when they IPO'd. What you want to avoid here is selling too many shares for acquisitive projects, and when the stock price shoots up the equity value the family holds would be less. Also note that IPO's are a dangerous route, you start selling shares and more often than not the founders will just lose control over the years, and its a bitch and a half to take private again.
Hi, also a little corp. finance advice:
Never have no debt. Your cost of equity is super high, and it would be super easy and cheap to get some debt (even in this market). I think getting some type of ABL / Term Loan from a corporate bank for acquisitions is a better idea than using equity. Seriously, the return of the market is what, 10%? 4% Risk Free rate, Equity Risk Premium of 6%, Size Premium of 5% because tiny company, assuming a 1.5 beta (spit balling here), You get 18% CAPM, which is wild. An ABL can be what, Sofr + 500? My numbers are floating and please feel free to comment if you have a better idea, but that right there is (SOFR = ~5%) a 10% Cost of Debt Pretax (Nominal not Current Yield, assume trading at par). Don't be afraid of debt if you have stable cash flows. And if you're truly afraid, get a fixed rate bank loan with the opportunity to refinance after n years.
NOTE: This is an anonymous post. Please refer to a finance professional for actual advice for cap raising and such. Don't trust me with financial decisions.
Probably would get closer to S + 700 and like 96-97 OID.
Not going to get S + 500 on a non-sponsored business with no real history of integrating.
>a lot of dry old white men
The horror… you’d be much better off with a team of 70 IQ Somalians managing the single most important moment of your company’s life
IPO makes no sense unless the family wants to monetize. Would create more value raising a acquisition facility to finance m&a and IPO in a few years and use the proceeds to to pay down that facility. Could probably raise a 150m delayed draw facility and go to market as a 70-80mm Ebitda business in 4-5 years. 40mm ebitda is a bit small and especially during a down IPO market.
Thanks for the information! What might the terms look like on an acquisition facility and would it have to be collateralized by the underlying assets (office space?)
1L first out TL at s + 3-400 with an ticking fee of 50% of margin (likely have a step built in), depending on assets you could play with collateral, but easiest way would be collateralized against substantially all asset
Bad idea. Sell to us for 5-6x instead and roll some equity so we can all make a ton of money in a few years. Trust me bro.
Could you share what sector in the consumer space this business is in?
In addition to what others have mentioned above, it's also incredibly hard for a business that's been solely family-owned and run to go public. There's so much public company compliance infrastructure, etc. to set up that even as a $35-$40m EBITDA company...you'd burn a big chunk of that on public company expenses. And the headache of surviving as a public company is tough...you'd probably have to find some public company ready executives to be the face, etc. Far from the ideal route to either raise capital or to monetize a portion of the ownership.
Making more money than a lot of big tech
How about hire a FA? Tobin & Co starts at 20k
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