Key takeaways for “What Does It Mean To Take Your Company Public?”:
- Understanding the process of going public
- Advantages and Disadvantages
- Key questions to consider if you’re thinking about taking your company public
What Does It Mean To Take Your Company Public?
By the middle of July, an impressive 126 American companies had filed to take their company public through IPOs in 2019. This represented a substantial 46.5 percent jump from the same time frame in 2018. IPO specialists Renaissance Capital reveal that the typical new public company has enjoyed an impressive 31 percent stock price increase from its original IPO price. There are plenty of reasons to consider going public, but what does it involve?
What Going Public Means
The phrase going public pertains to an initial public offering, or IPO, from a privately owned company. The IPO process to take a company public turns the company into a publicly owned and traded organization.
There are two primary reasons that companies would pursue this direction. Most of the time they are interested in raising additional capital so that they can expand operations. A second reason is so that venture capitalists are able to create an exit strategy for selling off their early stake investment in the company.
The road to take a company public starts when a company engages an investment bank to help with the process. The company has to decide the quantities and pricing of its shares that it will issue. It is up to the investment bank to underwrite the shares. This makes the underwriters the owners of the new shares who take legal responsibility for them.
The underwriter then goes through the process of selling these shares on the markets at a higher price than they paid the company for them earlier. Some of these investment banking deals with IPO issuing companies can amount to hundreds of millions of dollars or even over a billion dollars in a few cases.
Advantages and Disadvantages to Going Public
There are a number of great advantages to going public. It allows the company to build up its capital base and diversify the ownership along the way. The process makes it easier to engage in possible acquisitions as fresh capital becomes available. New public companies typically enjoy greater prestige as well. This increase in notoriety can be a significant driver for the sales and prospects of the newly public company.
Some disadvantages exist, and these should be carefully considered. The IPO process will often increase operating costs and create a greater amount of restrictions on trading shares as well as the management’s activities. In many cases, it puts pressure on growth over the short term. Becoming a public company will also mean that the company must do regular disclosures to markets and the public. A key consideration for the owners of the private company is that they will no longer have full control over the decision-making process of the organization that they founded and led.
Should You Take Your Company Public?
To weigh whether or not your company is ready to go public, you need to consider a few important questions.
1. What is my company’s value proposition?
The most important consideration to take a company public is if Wall Street investors will want to hear the story of the company. You should investigate how your competitors’ shares have fared after they did an IPO. It is always a good idea to learn from their experience.
At this point, you can put together your company’s story beginning with prospects for growth. Investors will want to understand the earnings and other key figures your company will generate. They also are keen to know the longer-term strategy for the company as well as your specific offerings that your competitors do not bring to market.
2. Is my Board up to snuff?
It is important to realize that the boards of directors of public corporations are far more visible to the public. This means that your team must be the right one for the new job. Some requirements include maintaining a board that has independent members. It will also require board committees that take responsibility for certain areas of the firm like compensation and auditing. You should allow yourself minimally a year before the IPO filing date to come up with profiles of the right new board members and then recruit them.
3. Am I comfortable with the transparency requirement?
Transparency nowadays includes real-time updates like Facebook and Twitter. All public companies (and some private ones) will keep these accounts active in order to satisfy investors and customers alike. It means that the prospect of going public will require fair disclosure and greater transparency, creating pressure on existing management.
Public corporations have to carefully evaluate the way that they disseminate news that could impact the price of their stock. There are tight restrictions that the Securities Exchange Commission enforces for fair disclosure of important company news. The SEC announced back in April that corporations are now allowed to utilize their social media in order to release significant announcements.
There is a caveat. Investors will have to be given the alert in advance. You will need to consider this when you are hiring a new communications director for the board. At least someone on the communications staff needs to have real experience in handling social media today.
Taking your company public is a big decision that you should not take lightly. The bottom line is that a number of underwriters will insist on your company having between $10 million and $20 million each year in revenues and profits on these sales that approximate $1 million.
Besides this, they will want your management team in place to be able to demonstrate growth rates for the future of a good 25 percent each year over a from five to seven year time frame. As with anything, there are exceptions to such stringent requirements. They do demonstrate that a great deal of work needs to be put in by you the entrepreneur before you enjoy the fruits of a successful IPO.
If you have any questions about how to take your company public, please feel free to contact us.