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 or spinoff a portion of its business into a new public entity, 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.
FAQs
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 strategy to reap their investment in a company they've invested in.
How does going public work? ›
In an IPO, a privately owned company lists its shares on a stock exchange, making them available for purchase by the general public. Many people think of IPOs as big money-making opportunities—high-profile companies grab headlines with huge share price gains when they go public.
What is the benefit to going public? ›
Raising capital is the most distinct advantage of going public. When companies go public, they sell shares of ownership to the public in exchange for cash. The raised capital can be used to fund research and development (R&D) and/or capital expenditure, or pay off existing debt.
What is going public what it involves? ›
Going public means an initial public offering (IPO) to raise capital by registering and allocating shares to public stockholders. Other going public methods are direct listing of shares sold by existing shareholders or a merger with a public shell or “blank check” special purpose acquisition company (SPAC), or spinoff.
What is one of the greatest problems of going public? ›
Loss of Control: One of the primary downsides of going public is the loss of control for the company's founders and existing management. Public companies have a responsibility to their shareholders, and decisions may need to be influenced by a larger group of stakeholders.
What are the three methods of going public? ›
Three popular methods are the IPO (Initial Public Offering), APO (Alternative Public Offering) and DPO (Direct Public Offering).
What are the steps to going public? ›
7 Steps of the IPO Process
- Choosing an Underwriter. Before starting any of the other IPO process steps, a company first has to connect with a reputable IPO underwriter or group of underwriters. ...
- Due Diligence. ...
- SEC Review and Road Show. ...
- IPO Pricing. ...
- Launch. ...
- Stabilization. ...
- Transition to Market Competition.
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.
How much revenue do you need to go public? ›
Optimal Company Revenue and Financial Levels for an IPO
Larger companies may wait until they generate $100 million to $250 million or even $500 million in revenue before going public. With the JOBS Act, an IPO revenue level can be lower than $50 million, as can a company's total assets.
Which is one disadvantage for a company that goes public? ›
Expert-Verified Answer. The company faces more government regulations is one disadvantage for a company that goes public. Thus, option (d) is correct. When a firm becomes public, the company has less discretion to take certain actions without board approval and the support of a majority of shareholders.
While companies get to keep most of their IPO proceeds, a portion also goes to investment banks, accountants, lawyers, and others who helped them with the IPO process.
What happens to employees when a company goes public? ›
That said, when a company goes public, shares and options are often subject to a lock-up period — typically 90 to 180 days — during which company insiders, such as employees, cannot sell their shares or exercise stock options.
Is IPO good or bad? ›
Investing in an IPO is one of the best ways to create wealth in the long term. You get to participate in the company's growth quite early on, giving you the chance to grow your capital.
Do companies get money from going public? ›
The money raised from an IPO is typically used by the company for various purposes , such as funding expansion plans , paying off debt , or investing in new projects . It can also be used to provide liquidity for existing shareholders , such as early investors or employees who hold stock options .
Does it cost money to go public? ›
Overall Cost: The overall cost of an IPO can range from $2.5 million to $10 million, depending on the size and complexity of the offering. This does not include ongoing costs of being a public company, such as legal and accounting fees, investor relations, and compliance costs.
How many investors before you have to go public? ›
Section 12(g) of the Securities Exchange Act of 1934 calls for issuers of securities to register with the SEC and begin public dissemination of financial information within 120 days of the end of a fiscal year. New regulations now require a 2,000 shareholder threshold.
