For most entrepreneurs, the ultimate goal and often a clear sign of success is taking a private company public by virtue of an initial public offering, usually referred to by its acronym IPO. This seemingly simple transition, which involves the public sale of the company’s stock on an open exchange, has gotten increasingly complicated over the years due to frequently changing regulations. These days, public companies must pass stricter scrutiny given that the sale of stock on the public exchange allows a company to increase its access to capital as well as its liquidity, but does so at the potential risk and expense of what are generally conceived of as more average investors. With venture capital and private equity, there are less onerous expectations given that the firms and individuals involved in those types of investments tend to be of higher net worths and able to take on more risk. In light of the complexity and expense associated with taking a company public, here are four ways to prepare:
Check the Requirements
There are different types of financial requirements depending on the exchange on which a company hopes to sell its stock. Obviously, finding out what these requirements are and evaluating whether a company meets them must take place prior to embarking on an IPO. The larger exchanges such as the New York Stock Exchange will obviously have heftier requirements, such as a certain amount of pre-tax earnings and/or audited financial statements for several consecutive years. Of course, there are smaller exchanges that tend to have less stringent standards and may focus on other kinds of financial requirements, such as revenue or cash flow. Ideally, a company that intends to go public will research this well in advance and create its growth strategy accordingly.
Assess the Market
Most companies that succeed in taking a company public are able to do so because there is a healthy interest in what the soon to be public company has to offer. Investor interest in IPOs often ebbs and flows, and sometimes the expectations for taking a company public far surpass its actual performance after the fact. Given the rigorous requirements and the costs associated with meeting them, a company has to be quite certain that the interest is there and that the timing is just right. The receptivity of the market to an IPO can be analyzed by reviewing the IPO activity for the most recent quarter, as well as notable trends by industry. There are plenty of reputable publications that frequently analyze and break down key IPO information.
Assemble a Team
More than likely, a company that is on the verge of going public already has a strong board of directors and cohesive management team in place. Nevertheless, getting through and surviving an IPO will require a substantial devotion of time and resources. For this reason, companies often add management personnel, usually with previous IPO experience, to help navigate the intricacies of the process. In addition, there are some regulatory requirements related to the independence of the board and/or the composition of committees, so some organizational restructuring may also be necessary.
Draft the Prospectus
The Securities Exchange Commission requires an IPO registration statement along with the principal offering documents, which includes the prospectus. This particular legal document explains the company’s background, goals, vision, strategy, and of course, the reasons that a prospective investor should make the investment and how it will likely fare over the long haul. The prospectus is essentially a written pitch that must tell the company’s unique story and hopefully captivate and entice potential investors. And, there are also regulations mandating the disclosure of certain information, so the prospectus must both elicit interest and provide concrete facts and figures to ensure transparency and comply with the rules.