In an economy that is driven by the need for consistent growth, most long-term thinking business owners will aspire to grow their business to the greatest extent they possibly can. At first, this might just mean bringing in your first employee. Later, you might decide to open a second location or expand to another city. But eventually, once your business has demonstrated its capacity to produce long-term value, you also might consider going public.
According to Statista, there were 159 IPOs issued in the United States in 2019. This figure is down from its peak of over 300 in the late 1990s, but it is still clear that quite a few companies are making the decision to issue an IPO. Additionally, it is important to note that not every publicly traded company is a billion-dollar corporation: there are dozens of companies on the NASDAQ and NYSE that generate $10 million in revenue per year or less.
Regardless, there is still no denying that issuing an IPO is a big decision. Furthermore, knowing when it is the right time to issue the IPO can also be quite challenging. With the 2020 COVID-19 outbreak, some companies are planning on delaying their IPOs until later this year or until 2021. But, at the same time, the relatively empty IPO space might also yield some lucrative opportunities for business owners with higher risk tolerances.
In this article, we will discuss the most important things your business needs to know about preparing for an IPO. By taking the time to understand what this detailed process involves, you can decide if going public is something your business should someday strive to achieve.
What is an IPO? How do initial public offerings work?
An initial public offering, also referred to as “going public”, is an event that involves a company putting its own shares of stock on the market for the very first time. Prior to issuing an IPO, the business was privately owned. An IPO creates an opportunity for a business to raise large amounts of capital, but it also creates a major structural change for the company.
Most IPOs are done with a partnership between the business aspiring to go public and an investment bank of their choosing. The business will also typically work with an independent accounting firm of their own. Most public offerings are planned about 6-12 months in advance. For a fee (about 3 to 7 percent), the investment bank will underwrite the IPO, help generate interest in the prospective stock, and also help navigate the complex legal framework. Prior to going public, the business will also need to prepare various financial statements, along with a three-year prospectus outlining the company’s near-term projections.
What are the pros and cons of issuing an IPO?
The most obvious reason that a business will issue an IPO is to help raise capital. Every share of stock that is sold gives money back to the business, which can help bring in millions or even billions of dollars in a very short period of time. The founders of the company will also usually hold onto some shares of stock of their own (often 51 percent), meaning that if they can run the company effectively, they will have an opportunity to increase their personal wealth. Additionally, public companies typically have an easier time attracting talented employees. There may also be branding, marketing, and publicity benefits as well.
Of course, issuing an IPO is not without its drawbacks, which is why there is still a somewhat limited number of IPOs occurring each year. The IPO process is a lot of work and, in some cases, the total costs can outweigh the financial gains. Owners may also be hesitant to give up control of their companies—issuing an IPO can eventually lead to a hostile takeover. Lastly, as a publicly-traded company, you will be subject to many more rules and reporting regulations, as required by the SEC and other agencies.
What types of businesses can benefit most from going public?
Naturally, going public isn’t the ideal solution for all businesses, but there are still quite a few types of businesses that can benefit from making this major decision. Your accountant—who should be familiar with your balance sheet, income statement, and statement of cash flows—should be able to help you effectively weigh the pros and cons mentioned above.
Generally, companies that decide to go public already have a sizeable number of employees and are likely operating in multiple different locations. Even if they are currently operating at a net loss—which many new companies do for years—the company has demonstrated a capacity to generate revenue and also has had at least some experience fundraising in the past. The company will typically choose to go public in order to raise funds for a large project, such as advanced digital infrastructure, a new factory, or any other major investment.
How can I prepare to go public?
Before your business even begins the process of going public, it will be absolutely crucial to get all of your finances in order. Having clean, clear, and up-to-date books will be necessary for working with both your investment bank and for working with the SEC. If you have not already hired an outsourced accountant or a fractional CFO, now is certainly the time needed to do so.
Once your business is ready to begin the process, you will need to choose an investment bank, or underwriter, that will help you complete the many hours of “grunt work” inherent with each new IPO. This will include generating a lengthy prospectus, as required by the SEC, that will outline the most important details of your business.
Both your accounting team and your investment bank will help you navigate the most important and complicated components of issuing an IPO. But in general, if going public is something that your business is seriously considering—even if you aren’t planning to do so for five years or even more—the importance of accurate accounting and record-keeping should not be overlooked. In a world where many IPOs are ultimately unsuccessful (with stocks peaking on their first day on the market), prospective investors will naturally be skeptical of any new business entering the market. By developing transparent projections, demonstrating a history of responsible financial decision-making, and outlining clear strategies for generating future revenues, your business will be well-positioned to succeed.
Deciding to go public will be one of the biggest decisions your business ever makes. Before jumping to any conclusions, be sure to carefully weigh all options. But if your business does decide to go public, as roughly 200 businesses decide to do each year, there will be plenty of opportunities to raise some significant capital.