What it means
An IPO is a complex, regulated process, and few companies attempt it alone. The lead advisor, usually an investment bank, assesses whether the company is ready, recommends the timing and structure, and helps value the business.
Other banks join as members of the underwriting group (the banks that agree to sell and, in many deals, take on the risk of unsold shares). The advisors prepare the prospectus, the legal document that describes the business, its risks and its finances.
They coordinate lawyers who check the disclosures, and auditors who confirm the financial statements. They also organise a roadshow, a series of meetings with institutional investors to build demand.
Pricing is the most delicate task. The advisors collect indications of interest in a process known as bookbuilding, then recommend a price that raises enough money without leaving the shares too expensive to trade well afterwards.
A price set too low leaves money on the table for the new investors, while one set too high can cause the shares to fall after listing. Advisors are paid mostly through the gross spread, a percentage of the money raised, which is shared among the underwriting banks.
The percentage often ranges from about 3% to 7%, and it is generally lower for very large offerings. Companies may also pay separate fees to legal, accounting and printing providers.
Choosing the right advisor involves more than the fee. Founders look at the bank's record in their sector, the quality of its research analysts and its ability to reach the right investors.
Conflicts also need attention, since the bank earns more if the deal closes and may have other relationships with the company. Timing and market conditions matter as much as the choice of advisor.
A strong advisor will tell a company when to wait, because listing into a weak market can cost far more than the delay. The finance team should therefore agree in advance what would make them pause or withdraw the offering.
In practice
Real-world examples.
Example
A fast-growing software company hires two investment banks to lead its listing. They prepare the prospectus, run a two-week roadshow with 60 investors and recommend an offer price after reviewing the demand. The company raises its target amount.
Example
A family-owned manufacturer considers an IPO and engages an advisor only to assess readiness. The advisor reports that the company needs two more years of audited accounts and a stronger board. The family decides to wait and use that time to improve its reporting.
Example
A biotech firm uses a specialised healthcare bank because investors in that sector trust its analysts. The bank introduces the company to funds that understand clinical trials. This helps to create demand at the offer price.
Formula
Calculation
Net proceeds = gross proceeds - (gross proceeds x gross spread percentage) - other offering expenses
A company sells shares worth $100,000,000 in its IPO. The underwriters' gross spread is 5%, which is 100,000,000 x 0.05 = $5,000,000. Other expenses for legal, audit and filing fees total $2,000,000. Net proceeds are 100,000,000 - 5,000,000 - 2,000,000 = $93,000,000, so the company keeps 93% of the headline amount.Case study
Seen in the real world.
Riverton Robotics is an illustrative, fictional company that planned to raise $150,000,000 through an IPO. Its chief financial officer compared three banks and noticed that the lowest-fee bidder had little experience with industrial technology and weaker contacts among relevant investors.
She chose a bank with a 6% spread over one offering 5%, a difference of 1% of $150,000,000, or $1,500,000, because it had a strong record in the sector. The bank assembled a group of long-term investors and the offering was oversubscribed, allowing the price to be set at the top of the range.
The illustrative lesson is that the cheapest advisor is not always the best value, since the quality of the investor base and the pricing outcome can outweigh a one-point fee difference.
Watch out
Common mistakes.
- Choosing an advisor on the headline fee alone, when sector experience, research quality and investor relationships often drive the result.
- Leaving advisor selection until the last minute, when the process usually takes many months of preparation.
- Ignoring conflicts of interest, when a bank may also lend to the company or advise the sellers.
Questions
People also ask.
Is the IPO advisor the same as the underwriter?
Often yes for the lead bank, but the advisor role can also include lawyers, auditors and communications firms that are not underwriters.
How much does an IPO cost?
Costs vary, but the gross spread often falls between 3% and 7% of the money raised, plus separate legal, audit and listing expenses.
What is bookbuilding?
It is the process of gathering investor orders at different prices to decide the final offer price.
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