Going public refers to a private company's initial public offering (IPO), moving to a publicly traded and owned entity. Businesses usually go public to raise capital in hopes of expanding.Additionally, venture capitalists may use IPOs as an exit strategyto reap their investment in a company they've invested in.
Key Takeaways
- Going public refers to a private company's initial public offering (IPO) and moving to a publicly traded and owned entity.
- Going public helps a company raise capital to invest in future operations, expansion, or acquisitions.
- The process may diversify ownership, impose restrictions on management, and open the company to regulatory constraints.
IPO Process
The IPO process begins with an investment bank to determine the number and price of company shares that will be issued. Investment banks complete the underwriting, becoming owners of the shares and assuming legal responsibility for them. The goal of the underwriter is to sell the shares to the public for more than what was paid to the original owners of the company.
Once a privately held company is ready to go public, the formal process typically takes six months. The process involves investment bankers, attorneys, and accountants, who work with management to navigate the IPO.
154
The number of U.S. companies that went public in 2023.
Requirements for Listing
Underwriters commonly require that companies meet the following requirements before going public:
- The company has predictable and consistent revenue, and thebusiness is mature enough to predict the next quarter and the following year's expected earnings.
- There is extra cash to fund the IPO process.
- There is growth potential in the businesssector.
- The company should be a top player in the industry.
- A strong management team is in place.
- Audited financialsare a requirement for public companies.
- Strong business processes are in place.
- Thedebt-to-equity ratioshould be low. This ratio can be a factor in derailing a successful IPO.
- The company has a long-termbusiness planwith financials spelled out for the following threeto fiveyears.
What Are the Advantages of Going Public?
A company that decides to go public commonly strengthens its capital base, makes acquisitions easier, diversifies ownership,and increases prestige.
What Are the Disadvantages of Going Public?
When a company goes public, it often creates pressure for short-term growth, increases costs, imposes more restrictions on management and trading, forces disclosure to the public,and often strips former business owners of control.
What Types of Companies Underwrite IPOs?
Some of the largest IPOs in the United States have relied on companies such as Morgan Stanley, Credit Suisse, and JP Morgan.
The Bottom Line
The timing of an IPO is crucial to avoid periods where the markets are unfavorable. To help ensure success, a private company should have factors in place before going public, such as a business model with sustainable growth potential and a strong management team.
