Your business is thriving, and you are ready to take it further. There are two common options suitable for this – M&A and IPO. But how do you know which path suits your business best?
To first understand this is to know exactly what each is as they both offer different paths with their own unique advantages and risks.
So what are M&A and IPO?
Mergers and acquisitions (M&A) involve transactions where businesses combine (a merger) or one company acquires another (an acquisition). This strategy helps companies achieve strategic growth by entering new markets, gaining new technology, leveraging each other’s expertise, talent pool, and network, or increasing efficiency through combined resources. For many SMEs, this is a proven way to expand quickly and efficiently without building capabilities from the ground up.
Meanwhile, an initial public offering (IPO) is when a company offers its shares to the public for the first time, becoming a publicly-traded company. This option is primarily about raising capital to fuel long-term growth, innovation, or debt repayment. While going public brings increased regulatory scrutiny, it also opens up access to larger funding sources and boosts company visibility.
Now, let’s take a look at the key differences between both.
#1 Purpose: Strategic Partnership vs. Raising Capital
M&A is driven by strategic growth. It’s about scaling rapidly, entering new markets, or enhancing efficiencies through synergies. For an SME, this means faster access to new opportunities, but it requires careful partner selection and integration. Working with an M&A service provider like ours can help you find the right partners as well as negotiate deals that create sustainable growth.
An IPO focuses on raising capital for long-term growth, whether for expansion, product development, or reducing debt. This option suits businesses looking for significant investment but comes with the pressure of meeting public expectations and maintaining performance.
#2 Process: Tailored Negotiations vs. Structured Compliance
M&A is a highly customised process, where every step is shaped by the specific goals of both businesses involved. This means in-depth due diligence and strategic negotiations, which can take time spanning from 9 to 18 months, depending on the deal’s complexity. Having a third-party consultant well-versed in the cross-broader M&A process ensures a smoother transition.
An IPO follows a highly regulated pathway, from preparing audited financials to engaging underwriters and securing regulatory approval. The IPO process can be complex, often taking time from 9 to 14 months from pre-submission to listing.
#3 Control and Ownership: Private vs. Public Governance
M&A can change control significantly. Whether it’s a full transfer of control (in an acquisition) or shared governance (in a merger), SME owners must weigh the potential loss of influence.
For those looking for a planned exit, M&A can be an opportunity to unlock and monetise the best value for your business. But for others wanting to stay hands-on, it might result in diminished control.
An IPO means dilution of ownership and decision-making, as public shareholders gain voting power. Increased scrutiny and the need for transparency can limit the flexibility SME owners may be used to, as performance must be consistently managed to meet shareholder expectations.
#4 Financial Impact: Immediate Restructuring vs. Long-Term Equity Gains
M&A can quickly transform a company’s financial landscape, often bringing immediate synergistic benefits and potential profitability boosts. While there are one-time costs (e.g. advisory and legal fees), the long-term gains from strategic alignment often outweigh these costs.
In contrast, IPOs provide an influx of capital but often come with ongoing expenses related to regulatory compliance, investor relations, and maintaining public company status. It’s an investment in long-term growth, but business owners should be prepared for continuous costs post-IPO.
At Nihon M&A Centre, we take a holistic approach to financial impact, evaluating how your business decision will reshape your company’s financial landscape. Our strategies are designed to optimise profitability, minimise risks, and align capital structures with your business’s long-term growth ambitions.
#5 Risk: Integration Complexity vs. Market Volatility
When you enter an M&A, there are often integration challenges to consider – blending operations, systems, and cultures. Failure to align these can hinder success, so careful partner selection and post-transaction planning are key. Therefore, it’s beneficial to hire an experienced consultant like us with cross-border expertise and knowledge to help you connect with like-minded decision-makers with the same values and goals.
IPOs face market risk, where fluctuating conditions can impact your company’s valuation. Public companies also need to balance short-term market performance with long-term goals, which can create challenges in maintaining consistent growth.
#6 Long-Term Implications: Strategic Shifts vs, Public Growth
With an M&A, you can redefine your strategic direction, unlocking new revenue streams or product offerings. This is especially useful if you’re trying to tap into new markets or expand your business capabilities. However, success hinges on how well the businesses integrate post-transaction.
IPOs can significantly increase company visibility and attract talent and partnerships. It’s often seen as a milestone or signals the company’s growth potential. However, maintaining performance to satisfy investor expectations is an ongoing challenge. The pressure to innovate while meeting market demands is real, but for the right business, it can result in strong long-term growth.
Key Considerations for SMEs:
When deciding between M&A and IPO, ask yourself these questions:
- What are the objectives for shareholders and the Company? If planned retirement, further product development and market expansion, or diversification are what you’re looking towards, M&A could be more suitable. But if you’re looking to raise capital without diluting the control for organic long-term growth and enhance your company’s public profile, an IPO could be the way forward.
- How much control do I want to retain? M&A may offer flexibility but could result in loss of control while with IPOs, ownership is diluted with public accountability.
- Am I ready for market scrutiny? Because of its nature, IPOs demand transparent operations and consistent growth are expected from public shareholders. If you’re not ready for this level of visibility, M&A might be a better option as the focus is then on integration and strategic alignment with your partner, allowing you to avoid the demands of public scrutiny while still achieving growth and expansion.
Both M&A and IPOs present growth opportunities and risks. At Nihon M&A Centre, we help SMEs navigate these complex decisions with expert strategies tailored to your business goals. If you decide on the M&A route, we can turn opportunities into lasting success for your business.
Ready to make your next big move? Get in touch with us!
