For small and medium-sized enterprises (SMEs), growth is a key priority. Many entrepreneurs and business owners look for ways to expand and gain access to additional resources. While going public through an Initial Public Offering (IPO) may seem like an attractive option, it is often not the most feasible or effective path for SMEs. In contrast, mergers and acquisitions (M&A) offer a more accessible and streamlined alternative. Here’s why M&A is often a better choice for SMEs compared to IPOs:

1. The Lengthy and Complex IPO Process

The process of taking a company public is notoriously lengthy, complex, and costly. The first step involves preparing for the IPO, which can take months, or even years, to complete. Companies must meet stringent legal, financial, and regulatory requirements, including:

• Audited Financial Statements: IPOs require years of audited financial statements, often for a minimum of 3 years. SMEs may not have the financial resources or infrastructure to manage this level of detailed reporting.
• Due Diligence: An extensive due diligence process is needed to assess the company’s operations, finances, and legal standing, which often requires external consultants, lawyers, and accountants. This can be a significant burden for smaller companies that don’t have the necessary resources.
• Valuation: Determining an accurate valuation of an SME can be difficult due to limited market exposure and smaller financial history.
• Regulatory Compliance: Navigating the complex web of national and international securities regulations can be overwhelming. SMEs must comply with multiple regulatory bodies such as the Securities and Exchange Commission (SEC), which adds to the complexity and cost.

Want to avoid the headache of going public? Contact us to explore the simpler, faster M&A process.

2. Cost-Intensive IPO Process

An IPO is a costly venture, and for SMEs, the expenses can be prohibitive. The costs involved in preparing for and executing an IPO include:

• Underwriting Fees: Companies need investment banks to underwrite the offering, and their fees typically range from 3% to 7% of the total funds raised, which can add up to millions of dollars.
• Legal and Accounting Fees: Legal, accounting, and consulting fees for regulatory filings, audits, and documentation can be substantial.
• Marketing and Roadshow Costs: Companies must budget for investor presentations, known as “roadshows,” which involve significant travel and marketing expenses.

For SMEs with limited financial resources, these costs may outweigh the benefits, especially when compared to M&A, where the costs are often lower and the process faster.

Want a cost-effective solution for growth? Contact us to see how M&A can help you scale with lower upfront costs.

3. The Regulatory Hurdles and Public Scrutiny

Once a company goes public, it must adhere to continuous reporting requirements and be under constant scrutiny from regulators, investors, and the public. This includes:

• Quarterly and Annual Reporting: Public companies are required to file quarterly earnings reports and annual financial statements with regulatory bodies. These reports must be publicly available, exposing the company’s financial details to competitors, customers, and even the general public.
• Corporate Governance Requirements: Public companies are held to high standards of corporate governance, including having independent directors and committees, which can be a challenge for smaller companies.
• Market Pressure: Public companies are under constant pressure from shareholders and analysts to meet short-term financial goals. This can distract from long-term business growth strategies, particularly for SMEs that are focused on sustainable growth.

In contrast, M&A does not subject the company to the same level of public scrutiny. Instead, the business can grow privately, maintaining control over its operations and strategic direction.

If you want to avoid public scrutiny and keep your business operations confidential, contact us for a confidential M&A consultation.

4. The High Barrier to Entry for SMEs in IPOs

The requirements for an IPO are designed with larger, more established companies in mind. For SMEs, these criteria can be tough to meet, including:

• Minimum Financial Requirements: IPOs often have minimum revenue and market capitalization thresholds that SMEs may not meet. In some markets, companies must have revenues in excess of $50 million or more to qualify for a public listing.
• Profitability: While SMEs may be growing, many are not yet profitable, and public market investors often require proof of consistent profitability before considering an IPO. This can be a major roadblock for many SMEs.
• Track Record and Scale: Many public markets require companies to have a long track record of successful operations and a significant scale of business, both of which are often out of reach for SMEs that are still expanding.

M&A, on the other hand, offers greater flexibility. Even smaller companies without the necessary financial history or scale can successfully participate in M&A deals. The key is finding the right partner who values your growth potential.

Looking for a faster, more flexible growth path? Contact us to learn how M&A can provide the access you need.

5. M&A Offers a Faster, More Predictable Path

One of the biggest advantages of M&A is its speed and predictability. Unlike IPOs, which can take years to complete, the M&A process typically involves:

• Faster Closing Time: M&A transactions can often be completed within a few months, depending on the complexity of the deal.
• Predictable Process: With M&A, both parties have a clear understanding of the process and what is required. The buyer and seller negotiate terms, and once an agreement is made, the transaction moves forward with relative speed.
• Strategic Fit: M&A allows SMEs to find strategic partners who complement their strengths and weaknesses, whether it’s entering a new market, gaining technological expertise, or acquiring new customers.

Want to fast-track your growth with a predictable and efficient process? Contact us to see how M&A can provide a smoother path forward for your business.

6. Better Control Over Ownership and Operations

IPO investors become shareholders in the company, often diluting the original owners’ control over business decisions. With M&A, the SME’s owners can negotiate the terms of the deal and maintain more control over the business, whether by becoming part of a larger organization or merging with another company to create a stronger entity.

In some cases, the SME may retain significant ownership and decision-making power, which is difficult to achieve in an IPO scenario.

If you want to retain more control while growing your business, contact us to discuss M&A options that offer more flexibility and control.

Conclusion: Why M&A is the Best Option for SMEs

While an IPO may seem like a glamorous route for growth, the process is time-consuming, expensive, and comes with significant regulatory hurdles. For many SMEs, M&A presents a faster, less costly, and more flexible alternative. By merging with or acquiring other businesses, SMEs can access new markets, technologies, financial resources, and expertise without the complexities and challenges of going public.

If you’re an SME looking for a growth strategy that’s faster, more cost-effective, and less burdensome than an IPO, contact us to explore M&A opportunities that fit your business goals.

Call us today at +81 3-5369-2930 or email jp_thailand_cs@tokyoconsultinggroup.com for a consultation on how M&A can be the right choice for your SME.