Initial public offerings ('IPOs') are among the most challenging transactions that a business can undertake. The decision on whether to list a company's shares on a public market is a significant one; obtaining a public quote is a major milestone in any company's life. The process of going public is time-consuming, but it is an opportunity for a company to critically examine itself. A company, its management and its owners are likely to be in the public eye to a much greater extent than before.

A company's decision to launch an IPO must be based on a realistic assessment of its business, its management resources, its stage of development and its prospects. Public ownership offers significant advantages, such as access to the public equity and debt markets to finance growth and strengthen a company's financial position, as well as the creation of an open market for a company's shares. However, a company will face heightened scrutiny and greater demands on its management.

Planning is a key element in any IPO. In order to avoid unnecessary delays and distraction, which could be costly, management should evaluate in detail how it will commit adequate resources to meet the pressing deadlines of an IPO process.

The run-up to a company seeking a listing on the Main Market can be broadly divided into two phases – pre-IPO preparation and the IPO process itself. Pre-IPO preparation includes the critical review of a company's business plan and growth prospects, assessing the management team, appointing an appropriate board, tightening internal controls, improving operational efficiency and resolving issues that may adversely affect the listing early on.

The United Kingdom Listing Authority's ('UKLA') Listing Rules set the specific regulatory requirements that a company has to meet to be allowed to list on a market. Unsurprisingly, a number of the UKLA's requirements coincide with the attributes which investors are looking for in a company. Areas such as a demonstrable trading record and appropriately experienced directors clearly help to satisfy both the regulators and the potential shareholders. Ultimately, the ability to meet the market's commercial expectations is crucial.

For management and owners, an IPO may also crystallise the need to examine their tax planning and personal wealth management. This should be addressed early to avoid distraction during the final, and often hectic, few weeks of the IPO process.

Businesses often begin their preparations for becoming public companies well before they launch the IPO process. Typically, pre-IPO preparations take four to six months, but they can take considerably longer. Advance preparation is a key success factor that allows for a smooth and efficient execution process and the ability to take advantage of market windows.

Management team

A company's management team will need to explain the business, its strategy and prospects to investors, and demonstrate knowledge of the sector, as well as its challenges, in order to gain the support and confidence of the market. The directors of a company will be accountable to its new and existing shareholders for the performance of the business when it is a public company. Therefore, as a company prepares for its IPO it may need to ensure that its management has sufficient depth and breadth.

Business plan

For the purposes of an IPO, a company needs a comprehensive business plan that sets out its products, markets, competitive environment, strategy, capabilities and growth objectives. Companies engaging in successful IPOs tend to have a clearly defined vision for the future performance of the business that can be articulated credibly, clearly and quantifiably. Companies that are in mature or shrinking industries, operate within small markets, or provide a narrow range of products to a small and highly specialised customer base may be unsuitable for an IPO.

Financial performance

A company should expect to show investors a consistent pattern of top- and bottom-line growth and a sound balance sheet post-IPO. For a company seeking a Premium Listing, its financial statements need to adhere to International Financial Reporting Standards ('IFRS').

Growth prospects

Before investing in a company, most investors want to feel confident about its future growth prospects. A company should develop a financial model that quantifies its business plan and expected growth. The sponsor may work closely with management and external consultants/experts to develop this model and will conduct due diligence on the assumptions behind the model and stress-test the projections.

Raising funds?

The majority of listings take place with a simultaneous share offering to investors. This can take the form of:

• raising additional capital for the business by issuing new shares in a company to new and existing shareholders (a primary offering)
• existing shareholders selling their shares to new or other existing shareholders, ie no additional capital is raised for the business (a secondary offering); or
• a combination of both.

If existing shareholders intend to sell in the IPO, it is helpful to know the likely quantum early so that the IPO can be planned accordingly.

Use of proceeds

If a company is raising new capital, the use of proceeds should be clearly articulated and in line with its strategy. In many cases, the proceeds will be used to either pay down debt, fund capital investment or to provide working capital for expansion. In determining the quantum of new capital, a company needs to consider its future capital structure and its ability to pay dividends at an appropriate level.

Financial controls

The market expects companies to have proper financial controls in place. In addition, the UKLA requires the sponsor to provide written confirmation of the adequacy of a company's financial controls. Companies contemplating a listing will therefore need to ensure that they have systems in place to ensure a flow of accurate, timely information.

Board

A public company needs to satisfy corporate governance requirements. The principles are set out in the UK Corporate Governance Code (the 'Code') and a company is required to comply with the Code, or explain why it has not, in its prospectus. It is typically necessary to appoint new members to the board who are independent and to form new committees (eg audit and remuneration). Identifying suitable candidates can take a significant amount of time. Potential directors often want to be involved in the IPO process at an early stage. The sponsor frequently assists in the recruitment and assessment of potential board members for a company seeking a listing.

Group reorganisation

The reorganisation steps undertaken in preparation for an IPO will vary, depending on the existing and intended group structure. One of the key steps is determining the jurisdiction of incorporation of the listing entity. At IPO it is essential to ensure that the group holds all assets, intellectual property and contractual rights necessary to carry on its business operations. Part of the group reorganisation may involve their transfer where they are currently held by related parties outside of the group. Change may be necessary to optimise a group's tax position, or to remove businesses or assets that are not part of the group to be floated. For example, company-owned horses, boats and so on are unlikely to be appropriate for a quoted company.

Determine employee and management compensation and incentive plans

As part of the IPO process, many companies review the amount of equity owned by their top executives and employees. Additional equity options or other incentives at the IPO may be granted to increase management and employee ownership and to align incentives from the IPO with a company's new investors. Remuneration consultants can advise on the structure of any schemes, as well as trends in the appropriate industry. The recommendations should be reviewed by the sponsor and bookrunner(s) to ensure that the awards are in line with market expectations.

Wealth management and financial planning

For many managers and owners of a business, an IPO is an opportunity to realise or transfer part of their wealth. Early planning of their personal tax and financial affairs is advisable to avoid delay or difficulty in the final stages of an IPO.

Controlling shareholders

Potential investors may be influenced, negatively or positively, by the presence of a controlling shareholder. A company should assess what will happen with such shareholders post an IPO, ie whether they will sell down some or all of their holdings, continue to have board representation or maintain veto rights on certain company decisions. In most situations, any special rights will be unwound and, where appropriate, a relationship agreement may be entered into as part of the IPO process to avoid potential future conflicts of interest.

Related-party transactions

Any internal transactions, compensation arrangements and relationships involving management or the board that might be appropriate for a private company but improper for a public company must be eliminated. A company should therefore consider whether any outside affiliations will be negatively perceived by the market.

Investor relations ('IR')

IR is the term used to describe the ongoing activity of companies communicating with the investment community. While the communication that public companies undertake is a mix of regulatory and voluntary activities, IR is essentially the part of public life that sees companies interacting with existing shareholders, potential investors, research analysts and journalists. Larger companies frequently create a separate IR function to meet the demands for information and to assist in all communications with the market.

The IPO process involves both a private and public phase (see 'IPO Process' chart above).

Private phase

A company seeking a listing is required to appoint a sponsor. The sponsor leads a company's team of professional advisers and coordinates their roles to ensure a company successfully completes the listing process. A full list of approved sponsors and their contact details is available on the Financial Services Authority ('FSA') website: www.fsa.gov.uk

Often, companies approach the appointment of advisers by holding 'beauty parades' with a series of sponsors, asking each about their expertise, experience and fees, and getting a feeling for what it would be like to work closely with them over an extended period. Since acting as a sponsor requires a high degree of commitment, the appointment process is often 'two-way'. Hence, the sponsor will also want fully to understand a company's business before agreeing to take on the listing.

The sponsor has responsibilities both to the company and to the UKLA. For example, the sponsor is required to submit an eligibility letter to the UKLA setting out how the company satisfies a number of the Listing Rules. The sponsor is also obliged to consider whether “the admission of the equity shares would be detrimental to investors' interests”.

In addition to the sponsor, a company needs to assemble a number of other advisers to guide it through the process. This includes the bookrunner(s), lawyers (one firm advising the sponsor/bookrunner(s)), accountants, financial public relations advisers, remuneration consultants, registrars and financial printers. Experts in valuations or sector consultants may also be appointed.

An IPO can generally be completed within 15 to 20 weeks. The exact timetable will vary depending on market conditions, the scope and complexity of the deal and a range of other factors.

A kick-off meeting is usually held in person and involves discussions to make sure that the working group fully understands the structure of the transaction, the process, timetable and all other relevant issues. The sponsor will usually provide a detailed organisation book that goes through all these issues in detail.

In order to ensure that the process remains on track, the sponsor is likely to organise weekly meetings/conference calls. These meetings give an opportunity for all parties to be kept fully up to date on the process and for any key issues to be raised.

Before a company can be listed, the sponsor must get a company's prospectus approved by the UKLA. Although the prospectus is a legal document, it is also a marketing tool to help to sell shares to potential investors. A company's lawyers usually take the primary responsibility for drafting the prospectus although the sponsor/bookrunner(s) assist a company in crafting the appropriate marketing story. The drafting of the prospectus takes several weeks and will involve all advisers. A number of drafting sessions will take place on various sections of the document. From a marketing perspective, the prospectus outlines a company's strengths, strategy and market opportunity.

The sponsor is responsible for submitting drafts of the prospectus to the UKLA. The UKLA is allowed 10 business days after the first submission to respond to the sponsor with a comment sheet. The company and its advisers will then revise the prospectus so that the sponsor can submit an updated draft with the UKLA for a further review. For the second and subsequent drafts, the UKLA responds via its comment sheet within five business days. As every transaction is unique, it is impossible to predict exactly how long this process will take. However, as a rule, the timeframe is approximately six to eight weeks from initial submission of the prospectus to the UKLA (approximately three to four submissions) to preliminary approval ahead of launching the transaction, often with a Pathfinder prospectus.

The overall purpose of due diligence is to ensure the accuracy, truthfulness and completeness of a company's prospectus, and to understand any issues associated with the company. While each professional adviser performs a different role in this process, the sponsor/bookrunner(s) will focus on the diligence of a company's operations, management, financial prospects, historical performance, competitive position and business strategy. The advisers will also look closely at factors such as a company's suppliers, customers, creditors and anything else that might have a bearing on the offering or viability of a company as a public company and on the accuracy and completeness of the prospectus.

Due diligence comprises many interrelated processes. Business due diligence is conducted mainly by the sponsor and bookrunner(s) and is designed to verify a company's business strategy and potential for future growth. As part of the information and fact-gathering process, the sponsor/bookrunner(s) may conduct onsite inspections, particularly for manufacturing and property-intensive businesses. They may also interview company officials, suppliers and customers to understand fully every aspect of a company's business and its financial statements. The knowledge obtained will later help the sponsor/bookrunner(s) and management to craft a strong, consistent message that can be used during the marketing process.

Financial due diligence is geared toward confirming a company's historical financial results and understanding its operational and financial prospects. Key areas of focus include:

• audited and interim financial statements
• capital structure
• breakdown of historical financials by business
• detailed review of budgets
• meetings with auditors
• budget versus actual financial statements
• accounting policies and auditor management letters
• use of proceeds
• financial control systems
• working capital requirements
• debt covenants.

Legal due diligence is conducted by the solicitors and is the process of verifying a company's legal records, material contracts and litigation. Key areas of focus include:

• litigation
• compliance with laws and regulations
• title to principal assets
• corporate structure
• debt covenants
• environmental issues
• intellectual property.

During this stage, a company's management, sponsor and lawyers work together to draft the necessary legal documentation and implement any required corporate restructuring. The collective purpose of these documents is to assure investors and regulators that the IPO has been objectively vetted for gaps, irregularities, misleading statements and other potential problems. The documents include:

• the placing agreement (if funds are being raised)
• comfort letters
• legal opinions
• lock-up agreements.

The sponsor/bookrunner(s) will assist a company on a number of matters critical to its transformation into a public entity. These include:

• discussion of valuation
• development of investment case
• the composition of the board and its committees
• internal controls
• prevailing market conditions.

The bookrunner(s) and sponsor will set up a comprehensive marketing plan to target specific investors.

For inclusion in the FTSE UK Index Series, it is important for overseas companies to note that:

• a company not incorporated in the UK will be required to publicly acknowledge adherence to the principles of the UK Corporate Governance Code, pre-emption rights and the UK Takeover Code, as far as is practical; and
• a company not incorporated in the UK must have a free float of not less than 50 per cent.

It is common practice for senior management to meet with the research analysts employed by the bookrunner(s) before the IPO and for such analysts to publish pre-deal research on a company before the start of the roadshow. To prepare fully for the presentation, several meetings and rehearsals with senior management are usually required. Material information must be included in the prospectus, but considerable additional information will be provided to the analysts to ensure a full understanding of a company's business and sector.

The main components of the marketing process are outlined below and explained at greater length.

The first time that a company provides specific confirmation of its IPO plans is in a public announcement known as the AITF. At this stage the marketing process begins in earnest, often with publication of research by analysts connected to the bookrunner(s). Larger companies are likely to have a carefully developed media PR campaign to promote knowledge of the business and management to the media.

At this stage in the process, a draft prospectus (also referred to as a Pathfinder prospectus) is often made available to prospective investors. This document is an almost final version of the prospectus. Apart from details of the precise size of the IPO and the subscription price of the new shares to be offered (which are unlikely to be finalised at this stage), it should include all other relevant details.

Investor education is the process whereby the analyst(s) referred to above market the story to investors using the research they have written. This takes place on larger IPOs and is in advance of the management roadshow.

The management roadshow is a series of meetings with potential investors. It typically includes a formal presentation by the CEO and CFO outlining the company's business operations, financial results, performance, markets, products and services. As with the analyst presentation, the role of the sponsor/bookrunner(s) in this workstream includes assisting a company in the preparation of the presentation and organising rehearsals.

Following the management roadshow and the pricing of the IPO, a completion meeting takes place where all relevant documents and paperwork are reviewed in their final form by both the directors and their advisers. The exchange of new shares for funds typically occurs three business days after pricing. During this three-day period, the shares may trade on a 'when issued' basis, meaning that the bargains are not settled until the listing becomes effective.

This is typically the day after the completion meeting and is the day on which the availability of the prospectus is advertised and the listing is officially announced to the market.

The prospectus must be submitted in final form, which will include the relevant pricing and size information, to the UKLA for final approval. The UKLA also requires any supporting documents, including directors' service contracts, audited accounts and all reports referred to in the prospectus, to be delivered on the date of approval. The UKLA only approves the prospectus on the day it is dated and published.

At least 48 hours before admission, the formal application for a listing is submitted to the UKLA. At the same time, a formal application for admission to trading is submitted to the Exchange.

This is the point at which a company's shares are 'admitted' to listing and the shares are traded publicly on the Main Market. The listing is officially granted by the UKLA in conjunction with admission to trading being granted by the London Stock Exchange.

Specific rules apply to a variety of businesses including investment companies and resource companies and certain financial companies. In some cases, expert reports will be required (eg to report on oil and gas reserves). Occasionally, companies may be able to IPO when they do not meet the three-year rule on financial statements, such as when they are seeking a Standard Listing. The requirements for listing should be discussed in advance with both the sponsor and the London Stock Exchange or the UKLA.

When contemplating an IPO, a company's management and its owners should not underestimate the significant time, resources and planning required in listing a company on the Main Market. There are two distinct stages: pre-IPO preparation and the IPO process itself. It is imperative for the success of an IPO that a company undertakes sufficient pre-IPO preparation to ensure it is suitable to become a public company. To assist in the planning process, a sponsor, which is usually an investment bank, should be appointed. A sponsor is able to advise a company through its pre-IPO preparation and will, during the IPO process, lead a company's team of professional advisers and coordinate their roles to ensure a smooth listing process.