Companies generally ‘go public’ with an initial public offering (IPO) as a way of raising capital for future growth while also increasing visibility for the business. By trading its shares publicly, a company can sell its own stock to investors, who in turn will also make money if the company succeeds in its future efforts.
Of course, in business, there’s no such thing as a free lunch. By trading away partial control of the company (in the form of stocks) in exchange for an injection of money, a company must answer to its investors on a regular basis – regarding its overall performance, strategy, and management decisions – for that day forward. Public companies also face a risk of outright takeover by hostile investors, in which case the company ownership and decision-making effectively change hands.
Moreover, reporting requirements for public companies take considerable effort and expense to compile, and involve heavy penalties for companies that fail to disclose, or incorrectly disclose, relevant company information. Certain types of sensitive business information necessarily becomes publicly available, opening the business to analyst and investor scrutiny. Additional considerations must also be made when forming your business strategy, as investors may decide to pull businesses toward the pursuit of short-term goals – even at the expense of potentially greater successes in the long term.
All of the above inconveniences can be overcome, of course. Tens of thousands of businesses have enjoyed great success after going public, and much depends on having the right financial advisers to manage the process smoothly.
However, the learning curve is steep, as the most difficult part of the process comes at the very beginning.
Steps involved in preparing for an IPO
To go public, a business and its financial adviser must first settle on an investment bank to begin the process. Banks that are more experienced, reputable, and widely known, will be best equipped to facilitate the IPO. When the time comes, the bank will be in charge of underwriting the IPO, and issuing the company’s stock.
Underwriting involves making a commitment to buy a certain amount of the company’s shares, and make them available for resale to interested investors. The underwriting agreement involves a great deal of legal documentation.
The next step in the process involves due diligence and regulatory filing. The company must open itself up for inspection, after completing a lengthy application document that includes disclosing sensitive company information to regulators. Once it is formally registered and checked by regulators, the underwriter will begin contacting investors to try and gauge the level of demand for the company’s stock.
Just before the date of the IPO, the company and its underwriter will agree on an opening price for the shares of stock. The stock then becomes available to the public, and depending on its performance, may undergo a period of stabilisation whereupon the underwriting bank can purchase shares to ensure price stability.
A few weeks later, the initial IPO period officially ends, and normal trading rules apply.
Other considerations
The process outlined above can be a demanding one, but it comes with its own rewards. In addition to the influx of investor cash that is made possible by an IPO.
For many businesses, the decision to go public will make perfect sense, given their internal structure, business objectives, and funding needs. Others, however, may find that they can meet all of their goals while remaining privately owned. Indeed, IPOs are just one of many ways to raise capital for future growth.
Possible alternatives include crowd-funding options, as well as debt financing, and secondary market transactions. Each option has its own advantages and disadvantages, but together they create a wide range of choices for businesses to consider as they look ahead to find the best way to meet their own specific needs.
Expert advice can help businesses sort out the different options that may be available, and choose the path that is best suited to their identity and their current stage of development.
