Despite the Australian Securities Exchange (ASX) listing thresholds increasing, more business owners are planning to list their businesses on the ASX, according to financial planning firm HLB Mann Judd.
Nicholas Guest, corporate advisory partner at HLB Mann Judd, says some SMEs have not reached the quality deemed necessary for listing on the ASX.
This, he says, is because of due diligence processes that “had some gaps”, as per a report released by ASIC in June 2016, which placed scrutiny on all SMEs seeking to list.
This scrutiny was especially placed upon businesses that were purchased solely for the purpose of being on-sold.
“I think there's a general concern … about businesses which have been acquired ... and then disposed and directly ... passed to more investors,” Mr Guest says.
Despite that concern, Mr Guest predicts there will still be a large volume of transactions involving SMEs in calendar 2017, proving the benefits of SMEs listing on the stock exchange.
Changed requirements boost transparency
According to Mr Guest, the rise in expected mergers and acquisitions of listed SMEs is due to recent ASX rule changes, which are designed to boost the transparency of listed companies, in turn making them more attractive to investors.
“The main focus of the ASX is … to ensure the quality of the businesses coming to them into the market and trying to protect the integrity of the ASX,” he says.
These rule changes include more complex background checks, to ensure businesses seeking to list are genuine, have operations and a history of solid financial performance, and adhere to the updated ASX guidelines.
What are these new changes?
Despite interest in SMEs, the guidelines for listing on the ASX are a tall order, and are not for all businesses.
From 19 December 2016, the ASX listing guidelines stipulate that:
- There must be a minimum of 300 investors who have no affiliation with the business, with each investing at least $2,000;
- There must be a free float (shares owned by someone not related to the business) of at least 20 per cent; and
- The business must meet the requirements of either the profit test or the assets test.
- Profit test: At least $1 million total profit from continuous operations over the last three years and an additional profit of $500,000 over the last 12 months.
- Assets test: $4 million net tangible assets or $15 million market capitalisation.
Despite the stricter guidelines, Mr Guest suggests that listing on the ASX can be a lucrative growth strategy for profitable businesses, by opening up additional revenue streams through onboarding investors.