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
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.
How does going public work? ›
Going public typically refers to when a company undertakes its initial public offering, or IPO, by selling shares of stock to the public, usually to raise additional capital. Going public is a significant step for any company and you should consider the reasons companies decide to go public.
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 are the requirements to go public? ›
Requirements for Going Public
- Board Approval. Going public starts with a proposal to the company's board of directors by the management of the company. ...
- Assemble Team. ...
- Review and Restate Financials. ...
- Letter of Intent With Investment Bank. ...
- Draft Prospectus. ...
- Due Diligence. ...
- Preliminary Prospectus. ...
- Syndication.
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.
Does going public cost money? ›
Underwriting fee
Investment banks charge underwriting fees as they take a company public. Underwriting fees are the largest single direct cost associated with an IPO. Based on public filings of 1,175 companies, costs to companies range an average of 4.1% to 7.0% of gross IPO proceeds.
What happens to my shares if a company goes public? ›
After the IPO, shares are transferred to the custody of the transfer agent who works to transfer shares directly to each shareholder. When the IPO happens, it's an exciting day but not one that grants immediate liquidity to most private market shareholders, whether they are early employees, executives or investors.
Which is one disadvantage for a company that goes public? ›
The Disadvantages
When companies go public, they are required to regularly keep the public updated about their activities and financial performance and do so in a certain way. These obligations are costly and can create public scrutiny.
What is an example of going public? ›
The President and the Media
This strategy has been dubbed going public. Example: At the end of 2002 and the beginning of 2003, President George W. Bush and his aides decided to “go public.” Bush made many speeches in support of going to war in Iraq, and he convinced many, many people to support the war.
When a company goes public, who gets the money? ›
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.
There are several ways public companies can go private. With a management buyout (MBO), existing management pools its resources to purchase all or a majority of the public company's shares.
Is it worth going public? ›
The company obtains increased prestige and visibility. Shareholders of the company benefit from holding shares that are, subject to certain restrictions, freely marketable and usable as collateral for loans. Shares that are publicly traded generally command higher prices than shares that are not publicly traded.
How long does it take to go public? ›
This guide will break down the steps involved in the process, which can take anywhere from six months to over a year to complete. Below are the steps a company must undertake to go public via an IPO process: Select a bank. Due diligence and filings.
Can you go public without revenue? ›
How much revenue do you need to go public? There is no minimal amount of revenue required to become publicly traded. We've successfully taken several companies public with $0 in revenue.
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.
How much do you make when a company goes public? ›
You can make anything from a few thousand dollars up to millions. It depends on how successful the company is, the number of employees with equity, the type of equity you have, and the lock-up period.
Do companies get money from 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.
Is it a good idea to go public? ›
Advantages to Going Public with an IPO
Companies will raise substantial amounts of capital through an IPO and subsequent funding rounds to fund general corporate operations, growth opportunities, R&D, marketing, capital expenditures.
How does a company decide to go public? ›
Requirements for Listing
The company has predictable and consistent revenue, and the business 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 business sector.
